The Interview - Bernard Lambilliotte, Ecofin: "We expect explosive development in China's renewable energy sectors"
Bernard Lambilliotte, chief investment officer of specialist utilities and infrastructure investor Ecofin, says the firm's newly-launched China Power & Infrastructure Fund is well poised to capitalise on the growth opportunities arising from China's USD586bn stimulus spending, much of which is being directed toward the infrastructure and energy space.
GFM: What is the background to your company and fund?
BL: Ecofin is a leading specialist in the utilities and infrastructure sectors worldwide, managing over USD3bn across a range of hedge funds, long-only funds and mandates, and invests through both public equities and private situations. The firm has a global team of 25 utility specialists, four of whom specialise in China. Ecofin was founded in 1992 and has offices in London, New York, Hong Kong and Geneva.
The Ecofin China Power & Infrastructure Fund is the latest addition to Ecofin's global utilities investment platform. The fund pursues a long-biased long/short equity strategy and focuses on investment in large-cap, liquid public equities. It aims to generate compelling risk-adjusted returns in greater China and capitalise on the long-term growth potential in China's utility and infrastructure space.
The fund seeks to generate absolute returns through dynamic portfolio construction and sector allocation based on macro and fundamental research. The fund was launched on July 1 with a starting capital of USD63m. Before the launch, Ecofin was already investing some of its assets in China though its global funds.
GFM: Who are your key service providers?
BL: The key service providers for the Ecofin China Power & Infrastructure Fund are Morgan Stanley International and Deutsche Bank as custodians and prime brokers, Citi Hedge Fund Services (Ireland) as administrator, Ernst & Young as auditor, and Simmons & Simmons in the UK and Maples and Calder in Cayman as legal advisers.
GFM: Have there been any recent changes to the management team?
BL: For the firm overall, the only change to the team has been the addition of David Silverstein in New York earlier this year. He came from Merrill Lynch where he was the no. 1 analyst in utilities high-yield debt as ranked by Institutional Investor for four of the past five years. He brings strong fixed-income expertise to our specialised utilities team.
GFM: How and where do you distribute your funds? What is the profile of your current and targeted client base?
BL: For the firm in general, we have long-term relationships across the investor spectrum. We have more than 200 current investors, spread fairly evenly between North America, Europe and Asia. Around 50 per cent of our hedge fund assets under management come from private banks and family offices, with the rest from funds of funds and institutional clients.
We continue to work with a sovereign wealth fund, managing a custom long-only mandate, and we are developing strong relationships with more institutions, especially as we will reach the five-year anniversary for our Global Utilities Hedge Fund in October. The China Power & Infrastructure Fund will be distributed globally.
GFM: What is your investment process?
BL: As with our other funds, the China Power & Infrastructure investment team combines top-down macro analysis and bottom-up company fundamental research in making investment decisions and develops investment thesis using both catalyst events and mismatches between valuation and stock price.
On the macro side, the investment team takes into consideration a range of factors such as economic activities, interest rates, commodity prices and the regulatory environment, and assesses the sensitivity of sub-sectors to each of these macro drivers. The team also leverages Ecofin's global platform as well as the firm's dedicated commodity research efforts.
The investment team is split between London and Hong Kong and frequently meets with companies in China. Both absolute and relative valuation metrics are considered in making investment decisions.
GFM: How do you generate ideas for your funds?
BL: Ecofin's investment strategy in China focuses on sub-sector allocations. The team develops a detailed understanding of the sub-sectors and isolates key macro and fundamental drivers for each. The team also spends time looking at each company, including management visits, in order to understand key fundamental drivers.
The combination of top-down and bottom-up views leads to a clearly articulated view on sub-sectors that inform our sub-sector allocations. We have often found our specialist angle enables us to establish views that differ from market consensus, and to identify catalysts and valuation arbitrage opportunities.
GFM: What is your approach to managing risk?
BL: The China Power & Infrastructure Fund employs Ecofin's existing risk management process and technology infrastructure. The risk team monitors the portfolio in terms of beta exposure, leverage and long-short ratios. Quantitative models are run to assess the portfolio's exposure to a range of factors such as the broader equity market movement and commodity prices.
GFM: How has your recent performance compared with your expectations and track record?
BL: The existing investments in China within the global hedge fund portfolio have delivered performance for the year to date more than 10 per cent higher than the broader Chinese market performance, but with 70 per cent of the volatility. Going forward we expect the fund to continue to produce superior risk-adjusted returns.
GFM: What opportunities are you looking at right now?
BL: The majority of China's ongoing USD586bn stimulus spending will go into the infrastructure and energy space, which accelerates long-term growth and also provides catalysts and dispersion among the sub-sectors.
GFM: What events do you anticipate in your sector in the year ahead?
BL: We will continue to witness the growth effect generated by China's stimulus spending efforts. We expect to see further market liberalisation of many-heavily regulated sectors, and tariff reforms as lower commodity prices and an inflationary environment create good conditions for a smoother transition to a more market-driven system.
Furthermore, we expect explosive development in the renewable energy sectors. The new renewable energy development targets that the government is setting will drive China's domestic investment in the sector, while at the same time global demand will provide huge opportunities for China's low-cost equipment manufacturers.
GFM: How will these developments affect your own portfolio?
BL: We see exciting opportunities both on a long-biased basis in selective sectors but also dispersions among sub-sectors and companies. The portfolio will have a clear overweight toward sectors that we believe are likely to benefit from upward tariff adjustments and high growth, as well as winners in the renewable energy space.
GFM: Are investors' expectations moving towards capital preservation?
BL: Our investment universe covers the entire value chain from cyclical upstream suppliers to defensive downstream asset operators. The defensive portion of our universe, which consists of traditional utility companies, tends to outperform the market in downturns. Hence if we take a more conservative outlook on the market, we can still manage capital in a way that delivers superior risk-adjusted returns in the market.
Overall we do believe that capital preservation and risk management have become more important since the credit crisis. However, the defensive characteristics of fund allocations in China, despite the rally this year, is reassuring in the sense that there is capital available to be allocated and any correction is unlikely to be too long or too deep.
GFM: What differentiates you from other managers in your sector?
BL: There is a lack of specialisation in China's equity market, and very few sector specialist funds at the moment. This provides a great opportunity for us to extract alpha on companies and industries. Ecofin has longstanding experience investing in the sectors worldwide and it is the same expertise and understanding of these industries that we are trying to apply to China.
By investing in US and European companies that form part of the same value chain as Chinese companies, Ecofin forms a more rounded understanding of the demand supply situation for the Chinese companies. Our global commodity market research is also very relevant to their fundamentals.
GFM: Do you foresee problems in raising mandates from investors through 2009? If so, what factors will drive investors back to your funds?
BL: Investors are very cautious and many are facing liquidity constraints themselves. Capital is scarcer in the current environment, and liquidity is becoming a primary concern for investors. In this environment, Ecofin's China fund provides investors with dedicated exposure to China's infrastructure and utility space, high liquidity (monthly with 30 days' notice) and no financial leverage on capital.
China, especially through our sectors, offers a rare spot of counter-cyclical and consistent growth as well as dispersion opportunity amid the global economic slowdown. We believe the supportive macro backdrop combined with Ecofin's specialist fundamental investment approach will enable us to achieve attractive returns.
GFM: Do you have any plans for other product launches in the near future?
BL: We continue to think about how we can generate profits for our investors, using our specialist investor knowledge across the industries that we cover and across capital structures. We believe there are some great opportunities in renewables, where we are already quite active, and in credit, where we have recently added to our team.
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