Can you give a brief overview of your strategy in terms of what you are trying to achieve for investors and your investment process?
Globally, there are 33 urban areas hosting over 10 million residents and this number continues to grow. The U.N. has projected this figure will accelerate to 43 within the next decade, mostly in emerging markets. As a result of this rapid urbanisation, innovative companies are building technologies and solutions to help cities operate in ‘smarter' and more sustainable ways. From efficient energy usage to smart mobility services, from responsible waste management to the Internet of Things connecting it all together, the end goal of Smart Cities is to improve urban residents' quality of life. And with the environmental impact inherent to urbanisation, the future of our planet and public health may very well depend on smart city management.
To capture this long-term megatrend we collaborate with data powerhouse MSCI and a board of leading industry experts to build an innovative range of thematic ETFs. Our Smart Cities ETF combines human insight, innovative data science and Artificial Intelligence techniques in a unique way to identify the companies that matter most, and ensure clients' portfolios stay one-step ahead. An ESG filter also applies.
The index we replicate aims to represent the performance of companies expected to derive significant revenue from areas like smart connectivity (IoT), smart buildings, smart homes, smart safety and security, smart mobility, smart waste and water management, and smart energy and grids. The index methodology employs a set of key words of theme-related products, services and concepts built using natural language processing and data analysis techniques. These key words help identify relevant companies based on the proportion of revenue that can be linked to the Smart Cities theme. Annually, the expression of the high-level index objective and associated sub-themes are reviewed with the consultative input of a thematic industry expert retained by MSCI. The index is filtered based on MSCI ESG Ratings (top 75% ESG performers), controversy scores and certain business activities. The index is equal-weighted with an adaptive capping to avoid liquidity concerns.
How are you positioning your portfolio in uncertain times?
We do believe, thematic investing including Smart Cities, targets the long-term economic, social, technological and environmental forces reshaping the world, as we know it. At Amundi ETF, we believe investors can benefit from these long-term opportunities by allocating part of their growth assets to megatrend-led thematic solutions. In the meantime, investing in thematic ETFs can help spread your portfolio risk, as returns tend to have lower correlations with swings in the major regional or sector benchmarks. The Amundi's Lyxor MSCI Smart Cities ESG Filtered (DR) UCITS ETF, unlike many other thematic ETFs in the market, is not entirely exposed to growth-oriented sectors, but it is rather more balanced, offering exposure as well to value-oriented sectors such as Industrials and Materials. As a result, in 2022 the strategy suffered less than other thematic strategies, delivering YTD performance close to that of the MSCI World Index.
Can you identify a couple of key investment opportunities for your fund you are playing at the moment in the portfolio? This could be at a stock, sector or thematic level.
The index we replicate invests in companies positioned in several critical sub-themes for Smart Cities such as Smart Connectivity (Internet of Things), Smart Infrastructure, Smart Buildings, Smart Homes, Smart Safety and Security (cybersecurity), Smart Mobility, Smart Waste and Water Management, Smart Energy and Grids. Among the top positions in the fund, we can mention Fortinet and Johnson Controls.
- Smart Cities need to include processes and technologies to protect sensitive data, critical infrastructure and citizens from cyber threats. Cybersecurity spending in 2022 could reach $172 billion in total, according to PWC. Fortinet provides cybersecurity hardware and software solutions for various security and networking functions.
- Buildings and buildings construction combined are responsible for 36% of global energy consumption and 39% of global energy-related carbon emissions in a year, according to the World Green Building Council. Smart buildings utilize energy efficient technologies to reduce their energy consumption and carbon footprint. Johnson Controls is well-established in the Smart Buildings sub-theme. The company provides tailored service solutions such low energy building devices (i.e. LED lighting, energy efficient heat pumps, electric car chargers), remote diagnostics, maintenance, serving a wide range of industries from workplaces to schools and hospitals.
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