Lansdowne Partners is raising an undisclosed sum for a long-only offering that will invest in the clean energy sector, according to a letter the firm sent to clients.
“We see the global power sector to be near the beginning of what promises to be a multi-year creative destruction process for an entire industry,” the report says, explaining the London-based firm’s decision to launch the Lansdowne Clean Energy Fund. “Companies and entire business models will be born and, conversely, disappear.” (An earlier version of this story said the fund was launching in the third quarter, based on a letter the firm sent to clients and obtained by Alpha, but a firm spokesman told us this morning after the story was published that the fund will actually be launching in the fourth quarter.)
What will drive these changes? Rapid declines in costs in the renewables area and new technologies, which Lansdowne tells clients is “starting to impact the energy sector on a large scale.” This is being supported by regulatory and policy actions, Lansdowne further explains. The new fund will invest in clean generation equipment, new energy technologies, renewable energy operators, and electrical infrastructure and power generators, among other sectors.
Lansdowne was founded in 1998 by Paul Ruddock and Steven Heinz. Ruddock retired in 2013 and Heinz left the following year.
These days, the firm is headed by chairman Stuart Roden. The firm managed nearly $15 billion in hedge fund assets at the beginning of the year.
Lansdowne specializes in long-short investing, driven in part by a strong macro view. At the beginning of 2015 it launched its first energy fund, the Lansdowne Energy Dynamics Fund (LED). In its first year, the fund returned between 12 percent and 14 percent, depending on the share class.
In the first half of this year the fund fell between 5.4 percent and 6.4 percent, depending on the share class. Virtually all of the loss was suffered in the second quarter.
Lansdowne says the Clean Energy Fund’s portfolio will consist of roughly 25 individual stocks and will be sort of a subset of the LED fund, “with very limited additional analytical work required.” The portfolio will include all of the industrial and renewables stocks and around two-thirds of the utilities stocks contained in the LED fund. Most of the focus will be on larger, more mature companies, “spiced up with next generation growth companies,” Lansdowne adds.
LED’s second quarter loss of between 5 percent and 6 percent was its worst since its inception. Lansdowne attributed a big portion of the second-quarter loss to the Brexit vote, with the rest mostly due to its renewable positions.
“Brexit has without doubt increased the near term investment uncertainty,” Lansdowne tells clients in its second quarter report for investors in its energy fund.
The firm asserts that little has changed outside the U.K., but there are now more risks in the market in general. As a result, the fund has “moderately scaled back” its risk at the same time it is maintaining its bottom-up stock-picking strategy.
Virtually all of the second-quarter losses came on the short side, split evenly between the Eurozone and North America. On a sector basis, more than half of the losses came from short bets against companies in the oil and gas industry. In fact, it lost 1 percent alone from shorting two oil services companies, citing the rally among North American oil services companies in anticipation of a recovery in shale activity.
However, Lansdowne is not buying into this rally, asserting that companies are not eager to ramp up capital expenditures, preferring to protect their dividends. The firm’s letter notes that one of its positions, an unidentified large U.S. services short, is unrealistically “pricing in a quick recovery back to the peak of the previous super cycle.” Longs within the same sector gained 1.50 percent for the quarter.
Looking ahead, Lansdowne says it sees an increased number of good values in the market. Still, it has cut back its net long exposure to 17 percent as of the end of June. Specifically, it was 98 percent long and 81 percent short.
Most of the portfolio is invested in value stocks — those with low price-to-earnings multiples and high dividends. Among sectors, most of the net exposure is to the utilities and energy infrastructure group.
Lansdowne’s favorite longs in the portfolio are three companies in the renewables industry. German wind turbine company Senvion, for example, is trading close to half the p/e multiple of its peers, which Lansdowne is confident will narrow or disappear. The other two stocks are First Solar, which makes solar modules, and SunPower, which makes solar panels and other related products.
The short book contains what Lansdowne calls “stocks with extreme valuations relative to actual fundamental prospects,” which includes stocks in the wind sector. Lansdowne is also short stocks it deems “structurally challenged.”
