“I am very bullish on our portfolio,” says Per Lekander, portfolio manager of the Lansdowne Energy Dynamics Fund, a global equity strategy which focuses on structural and cyclical trends in energy markets. “From a strictly long/short perspective, I have not been as bullish as I am right now for a long period of time.”

Speaking to EuroHedge in Lansdowne Partners’ Mayfair offices, Lekander, an ebullient Swede who once managed more than $1bn in utilities investments for Norway’s giant sovereign wealth fund, is discussing the expansive array of positions and themes that make up his investment portfolio. These range from conviction bets on major names such as General Electric and Tesla to thematic plays on the future direction of oil and renewables markets.

“We have some extremely high-octane things in the portfolio. On the long side, there are several change stories, and change stories are the ones I like the best because they are not contingent on the market to work.”

Lekander joined Lansdowne in 2014 to lead the London-based firm’s Global Energy Strategy, which consists of the main $897m Lansdowne Energy Dynamics Fund and the smaller $223m Clean Energy fund, a long-only ESG-focused strategy launched in January 2017.

-

Per Lekander

A veteran energy markets specialist, he previously managed a $1.3bn utilities portfolio at Norges Bank Investment Management. Before that, he spent almost nine years at UBS Investment Bank, where he was head of European and global utilities. Earlier, he had a consultancy role at McKinsey, and was a principal at the International Energy Agency where focused on renewables and emissions trading. He began his career in 1990 at the Royal Swedish Academy of Engineering Sciences where he was head of energy.

The Energy Dynamics Fund began trading in early 2015 with $30m pooled by a handful of partners, some friends and Lekander himself. Positioned as a thematic energy strategy, the fund invests long and short in core energy sectors, including oil and gas, renewables, utilities, infrastructure and commodity futures – as well as energy-linked sectors, such as capital goods, shipping, technology, autos and mining.

Having arrived at Lansdowne, the $17.8bn hedge fund firm established in 1998 by Sir Paul Ruddock and Steven Heinz, Lekander describes the fund’s initial launch period as “very tricky”, coming just months after the 2014 oil price collapse.

Designed with an annual return target of 10%, and a 10% volatility target, the strategy’s early days “were not easy at all,” he recalls. “If you trade energy, there is no limit on your potential return – or your potential volatility.”

Despite some early bumps in the road, the fund quickly hit its stride, gaining 14.8% in its first year of operation. Though it lost 5.6% in 2016, it swiftly rebounded in style with a 24% return the following year. Despite a tricky final quarter last year, with one of the strategy’s key positions – a short on Tesla – dragging on performance slightly, the fund still climbed more than 6% in 2018.

“Yearly numbers don’t necessarily always tell the truth,” Lekander says. “In 2017, it was clearly a comeback, but it was not that the positions really changed much – it was more a case of the trades that hadn’t really worked early on mean-reversed and began working.

“What I’m definitely proud of is that we have managed to keep to our volatility target. We have been sub-10% vol which, for an energy fund, is very good,” he continues. “Even when there has been very high conviction, things have never got very brutal for us.”
-
The steady showing so far has earned Lekander and his four-strong team back-to-back nominations in the Specialist Equity category at the EuroHedge Awards in 2017 and 2018. This year, the fund is flat to the middle of March.

The investment portfolio is built around 5-10 broad investment themes, which help inform stock selection and sizing, with names picked from a target universe of roughly 200 individual companies on a fundamental, bottom-up basis.

“We have just under 200 stocks which we feel we know. We have models, we have an investment thesis, we meet with company management, we look at company assets, valuation, management, the sector and we keep up-to-date with this volume of stocks which is gradually increasing,” he says.

Climate change and the drive towards renewables globally is a major thematic idea in the fund. From a broader top-down perspective, renewables and liquefied natural gas are the two main structural growth areas in energy markets right now, according to Joe Mares, a portfolio manager at Trium Capital. Both have cost and environmental advantages, along with government support, and equities which are exposed to these themes are generally trading at a premium to the sector, Mares says.

Lekander observes that a renewables system cannot operate on its own, and this view forms the basis for several key positions in his strategy.

“You can’t control when a windmill will rotate, so you need something in parallel, and what you’re going to have in parallel is gas. Gas is very abundant, it’s cheap, it’s the cleanest of the fossil fuels, and gas turbines are very flexible.”

This thesis is behind one of the fund’s main longs, the re-emergence of General Electric, a bet Lekander expects to play out over the next 2-3 years. The trade combines bottom-up aspects, such as a change in GE’s management and a shift in company strategy, with the broader theme of a re-emerging gas turbine market.

“GE was a totally mismanaged company for 15-20 years. There is now new management, and I really think they are making a difference,” he says. “But the key differentiating factor is that we think the gas turbine market is going to dramatically come back. It’s been stone-dead.”

GE has a global market share for large-scale gas turbines close to 50%, and in the US probably even higher, he says. “In Europe, you’re going to have to add between 20-30 gigawatts of new gas turbine capacity over the next six or seven years to avoid blackouts. That’s half the UK system. And there are really only two players here – Siemens and GE.”

Structural decline

Oil has proved a perennially tricky commodity for investors over the years, with volatile prices and fluctuating production historically entangled with geopolitical stand-offs. Here, Lekander believes the commodity is set to enjoy one final upcycle before the industry settles into a permanent structural decline.

“That permanent structural decline comes when demand turns negative, and the driver of this is what happens in transport,” he observes. “Go back 30 years – oil was everywhere in our economy. Half of oil demand was used for power generation back in the 1970s, for instance. Now, though, oil is essentially a transport fuel.”

- But with the trend towards hybrid cars and electrical vehicles picking up pace, oil’s status as transport fuel is set to be squeezed, turning negative by 2025, he says. US shale production – which plugged the gap during the 2014 oil price collapse – will help support the industry over the next few years before the long-term decline sets in, he adds.

But, warming to this theme, he is sharply critical of shale. “It’s an awful asset class in terms of investments,” Lekander observes. “It’s extremely capital intensive – you lose 60% of your production after two years.”

Accordingly, he has positioned the fund long in major exploration and production (E&P) companies, explaining that $70 a barrel is “absolutely perfect” for such firms, since they have strong revenues and little-to-no cost inflation.

“The firms that get the oil out of the ground are still going to have good revenues – because the oil price is still going to be relatively high. They have good margins.”

While bullish on oil, Lekander concedes it is a risky bet, stemming from his view that the nascent oil recovery so far is almost entirely politically created. OPEC continues to hold back capacity, while the political and economic crisis in Venezuela has seen production plummet from almost three million barrels a day during the Chavez administration to just one million today, a number which could halve once US sanctions really start to bite.

“I would be way more comfortable with an investment case which is based on genuine supply and demand,” he says. “It will turn into a fundamental one in a few years’ time, because supply is not really growing while demand is growing a bit. But for now, this is a political investment case.”

Don’t believe the hype

He also has plenty to say about the emergence of electric vehicles and driverless cars, and how the evolution of this sector underpins one of the fund’s key shorts, Tesla.

Larger penalties on emissions have put the squeeze on the traditional car industry, while, on the flipside, electric vehicles offer an improving driver experience, with instant torque and quieter engines. At the same time, the product benefits from regulatory incentives such as tax credits, preferential parking and preferential road lanes.

Yet the emergence of electric vehicles, and the attendant hype that has come with it, will ultimately give way to collapse, oversupply and, finally, maturity, Lekander observes.

“In this cycle, we are now in the late innings of the hype phase, and moving imminently towards the collapse,” he explains. “In the same way that Tesla has been the catalyst for kicking this off, I also believe Tesla will be the catalyst for creating the crash.”

Expanding further, he says Tesla’s success has pushed traditional auto companies to step into the EV sector and develop their own electric models. “They’re doing way more than they would have done otherwise,” he notes.

That has fuelled the hype around the sector, drawing in lithium mining, manufacturers and other various auto supplier companies.

“My thinking is that for now this space is entirely a short – you want to be short things that are exposed to what I see as the hype surrounding Tesla – the suppliers, the batteries, everything,” he says.

Added to this hype are the forecasts around how driverless technology will shape the car industry going forward. Lekander remains distinctly sceptical.

“Yes, cars are getting smarter. Of course we are getting driver assistance, and smarter cruise control, and some auto-steering in certain simple situations. But the idea that we are going to have fully autonomous vehicles driving around Mayfair by themselves, acting as robo-taxis, it’s just off-the-chart stupid.

“This market needs to collapse so people come to their senses and go back to basics. “

Once the collapse occurs, Lekander envisages a long trade around traditional incumbent auto companies, such as Volkswagen, who are gradually moving into the EV space, and whose valuations have been heavily impacted in recent years by the emergence of electric-powered cars.

“They have been viewed almost as dinosaurs, as dying companies,” he says of traditional auto manufacturers. “I think the whole autos sector will de-rate even further on this. But then at some point, the incumbents will strike back.

“It’s a double-edged sword – it was not a great industry in the past, it’s not going to be a great industry in the future. But it’s the same industry – and the valuation has come down massively. So I think there is a long trade there. The old auto industry will become the new auto industry.”

A sustainable direction

Other key bets that make up Lekander’s strategy include a strongly bullish long on carbon, and a long electricals/short combustion play.

The carbon long stems from increased EU carbon emission allowances, and he predicts that coal prices will plummet in the event of carbon prices reaching more than €50 a tonne. “The fact that we have had very soft gas prices has been the negative. But over the next three years, this market is going to start to work, and the reality is that we cannot reduce carbon emission with a carbon price below €50,” he says. “A low carbon price accomplishes nothing. It’s €20 a tonne now, so we are halfway towards making it work.”

Most analysis of European carbon markets predicts continued growth in carbon prices due to tightening regulation, and this is well understood by utility management teams and investors, suggests Trium’s Mares. “The impact of rising carbon prices on the steel, cement, shipping, and aviation industries is less understood, and will be a challenge to both regulators and investors,” he notes.

Meanwhile, carbon emissions, and the transition towards clean energy globally, also form the framework around the fund’s long electricals/short combustion bet.

“I’m not a member of Greenpeace. I’m not religiously environmental,” Lekander declares. “But the reality is that there is hardly a global or local environmental problem where energy and transport taken together is not the root cause.

“Two-thirds of carbon emissions in our environment, nuclear proliferation, poor water use, poor land use – you name it, it all comes down to this – transport plus energy.”

This “totally unsustainable” system is heading in a more sustainable direction, aided in part by government policy but driven predominantly by cost.

Mapping out the thesis, he observes that increased electrification in a range of areas not previously electrified has come as the cost of generating electricity has fallen. The flipside of this, he explains, is that combustion (“essentially everything that is burning to create heat, burning in a combustion engine and so on”) is seen as increasingly problematic.

In practical terms, the trade is being expressed through several long positions, such as Arizona-based First Solar, a solar panel and energy provider, and German utilities company RWE.

“RWE is an unbelievable change story – they’re going from being a big carbon emitter in Europe to becoming a big renewables play. I’m very bullish on some of the renewables names,” he adds.

One major short, meanwhile, is a large-scale diesel supplier (which Lekander declined to name) active in stationary power plants and marine applications, chiefly in emerging market countries such as Bangladesh and Pakistan.

“Five years from now that market is going to be zero. It’s being replaced by renewables and gas turbines as backups.”

With a career developing over the course of three decades, Lekander – who grew up in Alingsås, a small village on the west coast of Sweden not far from Gothenburg – says his enduring belief in efficient markets remains the cornerstone of his investment philosophy.

“I’m a big believer in the efficient market theory. Not in the absolutely extreme version where market prices are always right, but in the softer version that says you price in what the market currently knows.”

He describes his time at Norges Bank as “remarkably unpolitical” for a sovereign wealth fund that managed assets almost twice the size of Norway’s GDP.

“It was not the politicians which told us what to buy, which I think is unique among the sovereign wealth funds,” he suggests. “The way we were operating was very similar to the way you might operate at a classic market neutral long/short strategy.”

Comparing it with his current role, he explains: “I was actually more tactical there than I have been here at Lansdowne. I’ve been more longer-term here. Obviously the freedom here is way bigger here in terms of expressing your market views – the scope is wider; on the margin, up to 20% of the assets we can do in commodities here. I couldn’t do that at Norges.”

Asked about the evolution of his target market in the four years since launching the fund, Lekander recalls how the concept of energy transition was only beginning to gain a foothold, with renewables starting to undercut conventional energy in certain pockets.

“Now it is almost the opposite,” he says of today’s market. “You now have to go to extreme areas where renewables are not the cheapest.”

What of the investor view? While most are still inclined to shy away from energy-focused strategies generally, Lekander believes Lansdowne Energy Dynamic’s low correlation has helped draw more buyers towards the strategy.

“Obviously, we are correlated to some things – otherwise you just get money market returns – but we are not correlated to the market,” he says of the fund’s track record to date. “Another thing that some like is that there is an element to this strategy which tends to have a lot of inflection points. Inflection points both on the upside and inflection points also on the downside.

“But what everyone tells us is that there is no-one who has a portfolio even similar to what we have,” Lekander continues. “There is a real diversifying benefit to our strategy.”

Getting a kick out of energy on EuroHedge.