Concern over how the automotive sector will evolve toward electric cars has prompted fund managers to reduce exposure to traditional car makers in the U.S. and Europe.
In interviews with Institutional Investor, U.K. managers said they’re avoiding western car makers in favor of companies that produce batteries and components for electric cars to manage what they call “disruption risk.” James Balfour, U.K. equities fund manager at Aviva Investors, said the firm has “very limited, if no” exposure to automotive companies in Europe while noting there are concerns about the outlook for U.S. carmakers despite low valuations.
Traditional auto companies face increased competition from electric car makers such as Palo, Alto, Calif.-based Tesla and China’s BYD. The U.K. government this week announced plans to outlaw the sale of petrol and diesel-fueled motor vehicles after 2040, following similar policies by the French government two weeks ago and Norway earlier this year.
“The concern is that we know there is a shift to electric,” Balfour said in an email, but “nobody knows what the true make-up of the car park will be in the next decade or two.”
Balfour added that the picture is further complicated because the demand for vehicles – electric, combustion or hybrid - is relatively unknown. Ben Preston, an analyst at Orbis Investments, said his firm doesn’t hold any traditional car makers outside Japan, where he believes some manufacturers have been overly sold despite significant investment in research and development.
“There is a transition under way,” Preston said. “One of the problems with investing in car manufacturers is that they haven’t generated great returns, it is a fragmented industry and has been easy for newcomers to come in.”
There have been conflicting views within the auto industry in recent weeks as global car makers struggle to predict how a transition from combustion to electric engines will play out. Earlier this month, Volvo announced that starting in 2019 it would only make electric or hybrid vehicles, while Aston Martin’s chief executive Andy Palmer told the Financial Times that the U.K. government’s decision to outlaw combustion vehicles was “absurd.”
Janus Henderson Investors has been a vocal supporter of electric car maker Tesla, believing the next 10 to 15 years will be transformative for the car industry. Investors are increasingly aware of “a difficult transition for the incumbent automotive manufacturers,” according to Hamish Chamberlayne, the firm’s head of socially responsible investment.
[II Deep Dive: Not So Fast Tesla: Investors Fret Green Label]
“The cost of batteries is declining now and so the barriers to entry in the electric car market is shifting completely,” he said. “It does pull the rug out from underneath the feed of these traditional car manufacturers and I’m not sure the market has completely got on top of that.”
Chamberlayne said he recognizes that investors are taking a cautious view of traditional car manufacturers, but that the transition to electric vehicles may only be part of the story. Other factors, such as concerns about auto lending, may also be weighing on investors’ minds, he said.
