Nanuk's new world investment focus

Eric Siegloff is the Chief Executive of boutique investment group Nanuk Asset Management, which was established in 2009 to focus on investment opportunities and risks associated with environmental sustainability and resource use efficiency.

The firm has a global mandate and invests in listed companies associated with the broad themes of clean energy, energy efficiency, industrial efficiency, waste management, pollution control, food and agriculture, advanced and sustainable materials, water and healthcare technology.

In our interview below, Siegloff talks through some of the exciting investment thematics the Nanuk New World Fund has focused on, including companies involved in solar and wind energies, robotics, electric vehicle components, energy storage, carbon fibre technologies, and salmon farming.

As the costs of scalable technologies decline in line with increased take-up, the growth opportunities for investors will likewise increase over time.

Listen to our postcast, or read the full interview below.

Tony Kaye: I’m Tony Kaye, the editor of InvestSMART, and I’m talking today with Eric Siegloff, who is the Chief Executive of Nanuk Asset Management. Hi Eric, how are you?

Eric Siegloff: Hi Tony, how’s it going?

Tony Kaye: Yes, very good thank you. Eric, I wanted to talk to you today about the Nanuk New World Fund. Just to find out a little bit more for our listeners in terms of what the fund aims to do, and what it is doing right now. Now my understanding is that the fund has a focus on companies around the secular theme of environmental sustainability. Is that the best way of describing it?

Eric Siegloff: Yeah, that’s appropriate Tony. The key context for the fund and how it came about was our recognition that climate change, and water scarcity, and pollution where real challenges. We saw that there was a quite a large-scale change required to business practices globally – and we’re focused on listed global equities – to transition, let’s say, the world in the years to come towards greater environmental sustainability resource efficiency. We saw that there were a range of investment opportunities and risks associated with that transition. And so, what we focused on here is investing in listed companies, at the global level, which we can contribute to or benefit from improving environmental sustainability, resource efficiency. And one of the key drivers behind that was the rapidly falling costs that we’re seeing, particularly in renewable energies, and also more efficient industrial processes. And with those reduced costs we see that’s an attractive place for a corporate capital flows to come in, and basically leverage off of those benefits.

Tony Kaye: Okay. I wanted to talk a little bit about the firm’s approach to begin with, and then perhaps we can talk a little bit in more detail about what sectors you’re investing in and why.

Eric Siegloff: Sure.

Tony Kaye: So, how would you describe the firm’s approach, in terms of investing?

Eric Siegloff: Yeah, the investor approach I guess, would be fairly typical of investment managers. We’re looking for good quality businesses that have strong balance sheets, that are attractively priced. The thing that we’re focused on is the sectors, and the industries within which we believe these sustainable technologies and practices actually can be delivered. I think that’s the differentiating point. Our portfolio managers and analysts are focused on those industry insights and have developed industry expertise around that component or range of industry areas. And, that’s really the differentiating point for us.

Tony Kaye: Okay, because there are a lot of fund managers in the sustainability space, or certainly in the ethical investing space. So, how would you say that your fund is differentiated from those other funds in the marketplace?

Eric Siegloff: Yes, well I guess as a starting point we consider ourselves to be a global equity investor first and foremost. And then, within that, clearly we focused on sustainably themed investing. And then, as a part of sustainable themed investing we come about it from a prospect of positive screening. Looking for ‘E’ in ESG. Negative screening, that is excluding companies and industries that don’t meet certain ethical or social values and norms.

And as well as that, we are looking for a bit of outcome orientation in the sense of, we want to deliver to higher basic needs as a contribution to sustainable development goals. And this is something which you might have seen in the last two years where the United Nations have gone beyond the UN PRI [Principles for Responsible Investment] towards outlining the 17 key sustainable development goals for policymakers, and what we’re trying to do is to look at sustainability in the context of how we deliver to those goals as well. So, in terms of differentiation, I suspect it’s coming down, as you mentioned earlier. The way that we screen ... we’re positively focused. Our whole company is focused on the keys, if you like, the environment component of the ESG. We negatively screen for social and ethical values, and norms. And we try to bring about change, and to make, let’s say, that the planet, let’s say, more sustainable for the benefit of future generations.

Tony Kaye: Let’s have a bit of a talk about where the fund is investing in terms of sectors.

Eric Siegloff: Sure, sure. The way we come at this is we have defined our investment universe into eight broad sectors, and to highlight that as a starting point. Our investment universe is just under 1,000 global companies. It has a combined market capitalisation of around seven trillion US dollars. So, it’s a good space in terms of numbers and also market capital for us to work within, and invest within. Within that investment universe, the eight core sectors really relate to clean energy, energy efficiency, industrial efficiency. Going into other segments, waste management, recycling, pollution control, healthcare technology; and food and agriculture.

And to give you a sense of that our portfolio currently we have about 20 per cent invested in the clean energy segment. About 25 per cent invested is invested in the energy efficiency segment. And just over 20 per cent in industrial efficiency. So if you think about it, clean energy would be our investments in wind, and solar, as an example. Energy efficiency would be investments in battery technology, electric vehicles, electric vehicle parts, and contributions of that nook. And industrial efficiency would mean that we’re focused on things like robotics, and robots and ‘cobots’, in particular, laser welding, laser technologies, and the likes. So, that’s around 60 to 70 per cent of the portfolio. It’s quite a large producer manufacturing component to it, and also an industrial processing aspect associated with it as well.

Tony Kaye: Now, a lot of those sectors are obviously in quite early stages of development or at least in terms of roll-outs on large scale. So, what’s your investment timeframe into these types of areas in terms of achieving strong returns? Are you sort of looking at it on a fairly long-term basis?

Eric Siegloff: Yep, yes. All of our investments are examined on a long-term perspective. What we try to do within that is to look at any particular theme, and let’s say it could be an electric vehicles theme. And, we look at the full supply chain of electric vehicles. So, we look at all component contributions from, as an example of the lithium battery or lithium manufacturer through to GPS systems that run with cars to autonomous driving and active defence mechanisms within cars, right through to cars and the service. So, through the whole supply chain, of the car, of the mobile phone, the iPhone is an example, we would be looking at sensors and transistors and we are looking to break down each of the component parts of a particular theme, and look at what’s investible.

We do take an approach, which is to be very clear on those elements, or those segments of a supply chain, and ask ourselves the question, is it profitable, is it a good investment at this point in time? Bearing in mind that not all segments are profitable at a point in time. So we’re looking for supply dynamics, demand dynamics, pricing and also good industry and company fundamentals to make sure that we have those broader trends in line with the corporate financials that we are seeing as well.

So, within that, in terms of the way we go about investments, once the investment is made with industry and financial company insight, we will then monitor where there’s a return to target that we have established for each particular company that we invest in. And once that target gets met then we’ll look at that, revise, and it if looks likes that opportunity has met its price, then we look for other opportunities, and there are many to basically ensure that the portfolio is in the best position as we can at any point in time.

Tony Kaye: So what I think what you were saying there is that investing into the companies in the supply chain, part of the process is a cost-effective way of getting in on the technology?

Eric Siegloff: Yeah, and to be clear as well, it’s not as if our investments were in brand-new nascent technologies. I mean, some of these technologies have been around for many years. If you look at solar panels, for instance, they first came onto the market in about 1976, and the cost of those panels have come down markedly in price. And they’re down to the point we’re now, you’re getting a much greater scale and therefore a much greater supply into the demand, which is bought by consumers as well.

So, from that perspective we’re just mindful of ... we need to be mindful of the use, utilisation, the supply benefit, and then the cost of the technology as a going concern. So, again not nascent growth, new technology. We are not taking binary bets in terms of new technologies which are coming to the fore. Some of the technologies, for instance wind energy, have been around for a long time. But we do acknowledge that there has been a rapid move forward in the last couple of decades in communication, mobility if you like, and also technology. And what we’re finding is those two things are rapidly scaling up the potential that we’re seeing within this environmental sustainability and resource efficiency logic.

Tony Kaye: I suppose where a lot of these companies stand to benefit is where the cost of their technology continues to come down over time.

Eric Siegloff: Yes, exactly. And we are seeing that particularly in solar. And if you think about some of the global trends for instance ... and I think Tony, you would have seen from our recent seminar we talked about a range of analysis we’ve done on what we call the point of no return. There are tipping points that we see with certain technologies and practices coming into the market, and there is also a point of no return whereby the technology or practice is so obvious it’s going to take over incumbent technologies and practices. And when you see that those particularly the exponential improvements in costs over the years, we see them in computer processes and sensors and solar modules and lithium batteries, and networking components and the like, and you see for instance when you talk about energy and particularly some of the disruption that we’re seeing in energy.

I’m now referring to, as an example, the solar energy, renewable energy from solar, and renewable energy from wind, the costs are already coming down quite dramatically. They are projected to come down quite sharply in the years to come, in the next few decades, and quite clearly coming down to the point where we already know that solar is the cheapest form of new energy production right now. And wind will, with solar, overtake for instance fossil fuels as the cheaper sources of energy going forward. So, we’re at the precipice, let’s say of the next decade or two where we’re going to see quite transformative changes in terms of how the cost productions that we’re seeing in renewable energy is going to challenge, let’s say, the incumbent industries that we’re seeing at the moment. That’s from the cost perspective, that’s without even looking at it from a point of view of the need for a greater focus on climate change and the trajectory target as we’ve seen and discussed globally.

Tony Kaye: Yeah, there is certainly some big changes underway at the moment in terms of a whole range of different sectors. Out of the sectors which you have chosen to concentrate on, they’ve each got their own sort of unique positions, advanced materials is quite an interesting one. What’s the main focus into that sector?

Eric Siegloff: Yeah, we’ve got a range of focuses within that component. It’s about 10 per cent of our portfolio, right now. And, as a starting point I guess, sustainable fibres is one aspect of this. As a company, we’re investing in an Austrian company called Lenzing, which has gone some way to developing sustainable fibre technology, and we’re noticing a couple of large named global brands, clothing companies like Zara, for example, are basically using their Tencel product that comes from that. We’re invested in companies like Corbion, which is focused on bioplastics and similar materials.

Also in the brands material or the light-weight materials segment, we’re invested in a company, for instance, Hexcel. And Hexcel is a company focused on carbon fibre manufacturing production. And they actually produce the bodies, the wings for the 787 Dreamliner. Clearly a lighter aeroplane means they can fly higher and be far more fuel-efficient in their travel as well.

So, again the fuel efficiency aspect comes into play here because, again resources efficiency, lower fuel, lower greenhouse gas emissions, and that’s the way that works through. So, there are three examples of what we’re specifically ... companies within that advanced spannable materials segment, which we think is going to be more important moving forward. And if you think about it in terms of vehicles, the total auto vehicle supply in the world now is around 8 million new cars per annum. So, as we are moving towards lightweighting right now entering in the aerospace industry, we’ve already seen the beginning of lightweighting in the car industry as well. And we would expect that lightweighting to continue its trend, and at some point in the years and decades ahead become quite crucial in terms of the percentage of a car which is given over to lightweight materials.

Tony Kaye: Okay, another smaller exposure in your portfolio is food and agriculture. What’s the focus in that area?

Eric Siegloff: Yeah, so we have a number of focuses there, but I think the key one for us in recent years, and we’re still comfortable with this is in the area of food, and in particular we’re invested in salmon farming. A couple of companies are in our portfolio right now, one of which is Leroy. And these are Norwegian based salmon farming companies. We have seen that there is a growing demand for protein globally. We can see that the feeding lot to output ratio, the degree to which you feed, be it the cattle or livestock or fish, is best. Or fish versus other conventional areas, like lamb, cattle, etcetera. So the kilogram of protein coming out of fish is much more sustainable. We’re seeing sustainable farming and agriculture being a big part of providing towards health and wellbeing, but also food requirements for the world as well. So that’s one segment which plays into our sustainable resource efficiency theme, and it’s one where we’re still very comfortable with at this point.

Tony Kaye: And, another area from memory, I think you were invested into is automated grocery distribution. Is that a big growing area that you see?

Eric Siegloff: Yeah, that was something that we have an investment, which we have now exited that particular investment, and that’s because it exceeded our return to target by a large amount. Basically it had done what we thought it would do. That investment was a UK company called Ocado. And Ocado is basically a company focused on two things, logistics and also, if you like, automated warehousing. And what they do as a company is they’re basically a grocery provider, so instead of for instance going to Coles or Woolies you basically just go on your app, you order your food through this group, this group basically bypasses the retailers. It’s a wholesaler if you like. So, you order your food, and they will have it delivered by a very sharp logistics outfit. And then on top of that, the way they go about their store management or, if you like, their warehouse management, is they’ve integrated a high level a of automation in their warehousing to the point of using radio-controlled robotics, if you like, to basically help in terms of efficiency within their businesses.

So, their technology and their processes has been onboarded now from large significant retail groups in the US and in Europe as a starting point. And that’s one example of a company which has done well. It’s basically combined good service with automation, a good resource efficient way of doing things. It was able to get the scale on board, it was able to deliver in terms of the service requirement demanded by its consumers, and did well on the back of that. The licensing agreements they have are quite supportive of the company. As I mentioned, we are no longer invested in that company. It’s just hit the target, it’s a strong company, but we chose to look elsewhere to see if there any other opportunities which are coming up in front of us on that thematic as well.

Tony Kaye: Okay, Eric thank you very much for talking today about the Nanuk New World Fund. It’s been a pleasure to talk to you.

Eric Siegloff: Pleasure, thanks Tony. Appreciate it.

Tony Kaye: Thank you very much.

Eric Siegloff: Okay, bye.

Tony Kaye: Bye.