23 Feb 2021

Invest in the urban recovery with Smart Cities


The dramatic changes wrought by Covid-19 have upset basic assumptions about how cities work. And even though some urban changes were triggered by the pandemic, other major shifts – like remote work and digital commerce – were already growing well before it all began.

We believe that cities, the urban centres that drive so much economic growth, are undergoing a radical change. These changes will have long-lasting implications for the global economy and the performance of our investments.

We know our cities are already being reshaped by substantial forces: the global push to tackle climate change is making cities more sustainable and energy-efficient, while our increased reliance on data and connectivity means they are also becoming more digital.

Cities are hotbeds of innovation, and as they adapt to the new challenges, they will become smarter. Investing in the urban recovery could start to ‘future-proof’ your portfolio, combining the best of the utilities and industrials sectors, with an added growth tilt from the new technologies that will make it all happen.

Related content: what are Smart Cities?

smart cities

Chart source: Lyxor International Asset Management, as at 12/02/2021.

Learn more about the index holdings and performance

A prime example: commercial real estate

Real estate booms when cities grow. But the pandemic has radically altered how we work, live, and play in cities. These changes explain how different sectors have performed in the past year: technology has boomed, while commercial real estate took a beating. Across markets, property equities fell by c.15-18 percent (in sterling terms) between February 2020 and today1.

real estate

Chart source: FTSE Russell, FTSE EPRA Nareit Global Real Estate Index Series, as at 11/02/2021. Past performance is not a reliable indicator of future returns.

Maybe that isn’t very surprising. When the pandemic hit, offices were suddenly shunned in favour of remote work. Yet productivity remains high, and it’s now estimated more than 20 percent of the workforce can perform work remotely– three to four times as many employees compared with pre-pandemic levels2.

Potential share

Chart source: McKinsey, https://www.mckinsey.com/featured-insights/future-of-work/whats-next-for-remote-work-an-analysis-of-2000-tasks-800-jobs-and-nine-countries

With leases expiring and companies eager to slash property costs, the future of commercial real estate – both offices and retail spaces surrounding them – remains uncertain.

How we use these urban assets will change. “The future of urban, commercial real estate might not be quite as dire as expected,” says Lukas Neckermann, a Smart Cities strategist. “It might just look different than expected.”3

Cities were already changing to become smarter, more digital and sustainable, even before the pandemic. The big shifts, like working from home, look increasingly likely to become permanent. Urban real estate use is radically changing, creating new winners and losers.

Add these factors together, and we can see major investment opportunities in the urban recovery. A  new horizon has opened up for industrial and technology companies that help businesses adapt operations or physical spaces to the new ways of working. Here are two examples:

Shift #1: More companies turn to cloud security

Almost 70% of organisations using cloud services today plan to increase their cloud spending in the wake of the disruption caused by Covid-194. And a recent survey shows information security has been the top priority for companies’ IT spending in 20215.

With digital security moving away from on-premise, appliance-based firewalls, some security companies stand to gain disproportionally: Fortinet, Palo Alto Networks and Checkpoint are three technology-security companies whose offerings heavily lean towards cloud networking.

Fortinet’s revenue growth, for example, saw little negative impact from Covid-19, as it recently reported a 22% y-o-y sales jump6; Similarly, Palo Alto reported 23% annual sales growth7.

Shift #2: A wave of refurbishment

The Elevator and Escalator (E&E) industry is attractive to investors, since it delivers the upside of the construction sector during boom times (through companies’ new equipment segment), while shielding from downturns (providing steady income through the maintenance and modernisation business).

To attract leasers, but also due to likely new health regulations, commercial properties are set for considerable refurbishment activity. Lifts are already being altered to adjust full load (which ensures less crowding in lifts) and include touch-free operations.

Leading players in the E&E market like Otis Worldwide may reap the rewards. Otis is the largest among E&E companies, and its business is led by the equipment-servicing segment. Its recently-reported full-year earnings-per-share not only beat the October forecast – but also the pre-Covid outlook8. Other E&E players, like Kone and Schindler Electric, could also stand to gain.

A range of concepts, products and services pull together to shape the future of sustainable Smart Cities, including smart connectivity (IoT), smart buildings, smart homes, smart safety and security, smart mobility, smart waste and water management, and smart energy and grids.

Diversification is key to capturing the full value of companies shaping the future of urban living. The six companies above are among over 130 stocks held by the Lyxor Smart Cities ETF, as at February 2021.

Our Smart Cities ETF follows a novel approach, mixing rules-based indexing, artificial intelligence techniques and human insight to effectively capture the theme:

  • Seed words related to Smart Cities are chosen by our index partner MSCI and a thematic industry expert*
  • A final list of key words is generated using Natural Language Processing, a branch of AI
  • Company public records and filings are scanned for matching key words based on business descriptions
  • Eligible stocks are scored for relevance as measured by revenue attributable to the theme (25% minimum)
  • Further size, liquidity and ESG filters are applied, with a final selection of equally-weighted stocks re-weighted by fundamental scores (1-year sales growth, Return on Invested Capital, and % sales spent on R&D and Capex)

The result is a diversified fund, avoiding the common trap of concentrated-investing in a few, well-known, large-cap stocks. In fact, approximately half of our Smart Cities ETF is invested in small and mid-caps (by market capitalisation), providing investors with access to growth potential.

msci smart

Chart source: Bloomberg, Lyxor International Asset Management. Data as at 31/12/2020. Past performance is not a reliable indicator of future performance.

Our cities will recover from the Covid-19 crisis. As before, they’ll continue to attract people to work, to live, and to play. And throughout their recovery, new pockets of value are certain to emerge.

The view from Lyxor

Our world is changing. Technological breakthroughs, economic evolution and the climate emergency are reshaping reality for billions of people. Will your portfolio keep up?

Each of our Thematic ETFs combines human insight, natural language processing and data analysis techniques in a unique way to identify the companies that matter most, and ensure your portfolio stays one step ahead. As a pioneering ETF provider with a history of innovation, we’ve gone the extra mile to build some truly state-of-the art funds for a new state of mind.

We’re incredibly excited about this range and hope you can join us in preparing portfolios for change.

Target TER for these Thematic ETFs is 0.45% but has temporarily been decreased to 0.15% until September 2021.

*MSCI may seek input from outside market experts on the ongoing evolution of the theme underlying the index, and relevant seed words. However, such input is advisory only in nature. Use of any such input is at MSCI’s discretion, and may or may not lead to a change to the index or index methodology.

This article is for informative purposes only, and should not be taken as investment advice. Lyxor ETF does not in any way endorse or promote the companies mentioned in this article. Capital at risk. Please read our Risk Warning below.

1 https://www.ftserussell.com/products/indices/epra-nareit

2 https://www.mckinsey.com/featured-insights/future-of-work/whats-next-for-remote-work-an-analysis-of-2000-tasks-800-jobs-and-nine-countries

3 https://www.linkedin.com/posts/lukasneckermann_business-needs-a-tighter-strategy-for-remote-activity-6708392001978552324-t2MV

4 https://www.gartner.com/en/newsroom/press-releases/2020-11-17-gartner-forecasts-worldwide-public-cloud-end-user-spending-to-grow-18-percent-in-2021

5 https://www.information-age.com/gartner-cio-agenda-2021-spending-cyber-security-most-projected-123492611/

6 https://investor.fortinet.com/index.php/news-releases/news-release-details/fortinet-reports-fourth-quarter-and-full-year-2020-financial

7 https://investors.paloaltonetworks.com/investor-relations/news-releases/news-release-details/2020/Palo-Alto-Networks-Reports-Fiscal-First-Quarter-2021-Financial-Results/

8 https://seekingalpha.com/article/4402517-otis-worldwide-corporations-otis-ceo-judy-marks-on-q4-2020-results-earnings-call-transcript

Risk Warning

This document is for the exclusive use of investors acting on their own account and categorised either as “Eligible Counterparties” or “Professional Clients” within the meaning of Markets in Financial Instruments Directive 2014/65/EU. These products comply with the UCITS Directive (2009/65/EC). Société Générale and Lyxor International Asset Management (LIAM) recommend that investors read carefully the “investment risks” section of the product’s documentation (prospectus and KIID). The prospectus and KIID are available free of charge on www.lyxoretf.com, and upon request to client-services-etf@lyxor.com.

Except for the United-Kingdom, where this communication is issued in the UK by Lyxor Asset Management UK LLP, which is authorized and regulated by the Financial Conduct Authority in the UK under Registration Number 435658, this communication is issued by Lyxor International Asset Management (LIAM), a French management company authorized by the Autorité des marchés financiers and placed under the regulations of the UCITS (2014/91/EU) and AIFM (2011/61/EU) Directives. Société Générale is a French credit institution (bank) authorised by the Autorité de contrôle prudentiel et de résolution (the French Prudential Control Authority).

The products mentioned are the object of market-making contracts, the purpose of which is to ensure the liquidity of the products on the London Stock Exchange, assuming normal market conditions and normally functioning computer systems. Units of a specific UCITS ETF managed by an asset manager and purchased on the secondary market cannot usually be sold directly back to the asset manager itself. Investors must buy and sell units on a secondary market with the assistance of an intermediary (e.g. a stockbroker) and may incur fees for doing so. In addition, investors may pay more than the current net asset value when buying units and may receive less than the current net asset value when selling them. Updated composition of the product’s investment portfolio is available on www.lyxoretf.com. In addition, the indicative net asset value is published on the Reuters and Bloomberg pages of the product, and might also be mentioned on the websites of the stock exchanges where the product is listed.

Prior to investing in the product, investors should seek independent financial, tax, accounting and legal advice. It is each investor’s responsibility to ascertain that it is authorised to subscribe, or invest into this product. This document is of a commercial nature and not of a regulatory nature. This material is of a commercial nature and not a regulatory nature. This document does not constitute an offer, or an invitation to make an offer, from Société Générale, Lyxor Asset Management (together with its affiliates, Lyxor AM) or any of their respective subsidiaries to purchase or sell the product referred to herein.

Research disclaimer

Lyxor International Asset Management (“LIAM”) or its employees may have or maintain business relationships with companies covered in its research reports. As a result, investors should be aware that LIAM and its employees may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Please see appendix at the end of this report for the analyst(s) certification(s), important disclosures and disclaimers. Alternatively, visit our global research disclosure website www.lyxoretf.com/compliance.

Conflicts of interest

This research contains the views, opinions and recommendations of Lyxor International Asset Management (“LIAM”) Cross Asset and ETF research analysts and/or strategists. To the extent that this research contains trade ideas based on macro views of economic market conditions or relative value, it may differ from the fundamental Cross Asset and ETF Research opinions and recommendations contained in Cross Asset and ETF Research sector or company research reports and from the views and opinions of other departments of LIAM and its affiliates. Lyxor Cross Asset and ETF research analysts and/or strategists routinely consult with LIAM sales and portfolio management personnel regarding market information including, but not limited to, pricing, spread levels and trading activity of ETFs tracking equity, fixed income and commodity indices. Trading desks may trade, or have traded, as principal on the basis of the research analyst(s) views and reports. Lyxor has mandatory research policies and procedures that are reasonably designed to (i) ensure that purported facts in research reports are based on reliable information and (ii) to prevent improper selective or tiered dissemination of research reports. In addition, research analysts receive compensation based, in part, on the quality and accuracy of their analysis, client feedback, competitive factors and LIAM’s total revenues including revenues from management fees and investment advisory fees and distribution fees.