The first in a series of articles investigating growth sectors, developing technologies and niche themes that adventurous private investors can back in their Isas – and how they might do so.
It doesn’t take a genius to work out that many companies in the green energy and infrastructure sectors will thrive in the coming years. It is more difficult to decide which ones and how to invest in them.
Boris Johnson has just aired a new pledge to cut UK emissions by an ambitious 68 per cent by 2030 based on 1990 levels – and urged other world leaders to bring similar targets to a virtual climate summit on 12 December.
With Joe Biden set to bring the US back into the Paris Agreement fold, major carbon policy commitments across the developed world will pour money into clean energy, renewables, and green technologies, interest in and expectations of such industries are burgeoning.
Renewables like wind and solar power are just one way in which the global economy will transform as it decarbonises over the coming decades.
The excitement might be even greater around China’s pledge to be net-zero by 2060, according to Chris Salih, research analyst at FundCalibre.
‘China produces about a quarter of the world’s emissions,’ he explains.
‘President Xi also hinted at an acceleration in shorter-term action with a pledge that emissions would peak before 2030. And China has a habit of under-promising and over-achieving.’
Jason Hollands says it is notable that a huge disparity in performance between oil stocks and renewable energy opened up during the pandemic.
Until the positive vaccine news of the last month or so, investors shifted away from economically sensitive, traditional industries like oil and clamoured for disruptive, new technologies.
The chart below shows that while the S&P Global Oil Index is down 31 per cent over the last 12 months, the S&P Global Clean Energy Index has surged an incredible 106 per cent.
How the pandemic opened up a massive gap between fossil fuel and clean energy stocks.
There is inevitably some sentiment driving retail investors in this sector: they want to back solutions to a perceived global crisis, as well as earn returns. A similar sentiment has propelled huge amounts of cash into ESG (environment, social and governance) funds in the last few years.
But here we are looking at funds investing in firms engaged specifically in environmentally-focused sectors or subsectors. Not just renewables and green infrastructure but waste management and sustainable agriculture, forestry and water supply.
There are many very good ESG funds out there with strict mandates, and others that are a bit ‘greenwash’-y. There are some very high-performing ESG funds out there and some less so.
But, as well as being driven by a wider set of criteria than just environmental impact, they are almost all generalist funds investing in many sectors.
One way street? Commitments to transitioning the economy towards renewable energy are growing in the UK and across the globe.
The companies held might be both strong and ethical. But most will not be engaged in recognisably green endeavours, and will not necessarily benefit from the rapid secular transformation that is now under way.
Indeed this focus can throw up some anomalies: for instance a green energy fund could hold oil and gas and utility firms that are pivoting to invest in clean technologies.
It can also be difficult to sort the reasoned bullishness from the hype. Sceptical analysts fear that in these sectors some share and fund prices have been inflated beyond sensible valuations by faddishness, and / or that future successes have already been priced in.
Hollands says concerns of an investment bubble are worth noting: ‘It is worth pointing out against the backdrop of all the supportive tailwinds, that the average price/earnings ratio of the S&P Clean Energy Index is already an eye-popping 46 [times earnings].’
The other perspective is that the switch to green energy and technologies is in its infancy: while it’s a bit expensive and there will be some dud firms that get left behind, it’s a one-way street for the sector as a whole. Follow the money, as the cliche goes.
Hollands says that among active funds there are ‘two key routes when it comes to investing in renewable energy’. The first is to invest in operational energy infrastructure projects, such as solar panels and wind farms, through listed investment companies – which will be the subject of our next article.
‘For investors who are less fussed about income and are more interested in tapping into the long-term growth potential of businesses involved in renewable energy and energy efficiency,’ he adds, ‘then funds investing in clean energy equities may be a more appealing approach.’
THE BEST PERFORMING FUNDS OF RECENT YEARS
As the familiar investment industry proviso goes, past performance is no guarantee of future returns. But in terms of seeing what’s available, it’s certainly a start.
Our focus narrows down the field quite substantially: there are many more sustainable or ethical funds to choose from than there are ones enaged directly in the ‘greening’ of the economy.
With the help of investment platform AJ Bell, we sorted through the top performing OEICS of the last three years – reasoning that in a rapidly developing field, recent performance should be given more weight than in most sectors – to pick out eight funds.
Benchmarking in this area is haphazard however, which makes comparing performance tricky.
|Fund||Return % 1 yr||Return % 3 yr||Return % 5 yr||Return % 10 yr||Sector||Size||Benchmark||Ongoing charge|
|Guinness Sustainable Energy||68.2||85.9||119.9||44.2||IA Global||£213.5m||MSCI World||0.74%|
|BlackRock GF Sustainable Energy||46.8||67.8||136.1||160.9||IA Specialist||£1.609bn||No Specified Index||0.90%|
|Pictet Clean Energy||45.3||60.2||123.7||147.4||IA Global||£2.04bn||MSCI AC World||1.11%|
|Pictet Global Environmental Opportunities||27.2||49.4||122.5||215.5||IA Global||£4.642bn||MSCI AC World||1.11%|
|Nordea Global Climate and Environment||24.8||44.6||N/A||N/A||IA Global||£4.419bn||No Specified Index||1.14%|
|FP WHEB Sustainability||17.8||34.5||87.5||142.9||IA Global||£494.4m||MSCI World||1.05%|
|Jupiter Ecology||17.8||30.4||78.7||161.0||IA Global||£612m||IA Global||0.78%|
|Impax Asian Environmental Markets||26.9||29.7||92.0||76.1||FO Equity – Asia Pacific inc Japan||£96.7m||Composite||1.21%|
|Sector : IA Global TR in GB||13.6||31.4||81.5||157.6|
|Index : MSCI World TR in GB||11.0||33.2||88.9||207.9|
|Funds are ordered according to total returns over the last three years. Data correct as of end-Nov 2020.|
The two consistently stand-out performers are Blackrock Sustainable Energy and Pictet Global Environmental Opportunities, according to Laith Khalaf, financial analyst at AJ Bell.
Pictet GEO holds companies focusing on energy efficiency and also invests in companies tackling other key environmental issues such as waste management and pollution control. It is the only fund in our table that has beaten the world index and the global funds sector over ten years.
A quick look at a list of 1,642 widely available OEICs, shows that the Pictet GEO fund sneaks into the top 100 performers over the last three years with its total return of nearly 50 per cent.
Khalaf adds that: ‘Guinness has an absolutely awful period of performance shortly after it launched, losing around 80 per cent of its value between 2008 and 2012. Not many funds make it back from that kind of sustained poor performance, but Guinness Sustainable Energy has shown some bouncebackability, and recent performance has seen a marked improvement.’
How seven of the funds in our list compare over five years by total return (omitting Nordea Global Climate and Environment, which has been going less than five years). Data courtesy of AJ Bell / FE Analytics.
The Impax fund is something of an anomaly as it invests exclusively in Asia – although given the region’s rapid recovery from the Covid crisis and the China emissions pledge, this might be no bad thing.
WHEB Sustainability (see analyst picks below) is the closest thing to a general ESG fund but an examination of its holdings show a focus on specifically green sectors. The fund invests globally across themes like environmental services, resource efficiency, water management, sustainable transport and cleaner energy.
Jupiter Ecology is an old-timer for this sector, managed by Charlie Thomas since 2003. It makes long-term investments in companies which are involved in recycling, energy saving and water treatment.
The youngest fund on the list meanwhile, Nordea, has a strategy devoted to resource efficiency and companies improving efficiency with their products and services. One holding is HexCel Corp, the leading carbon fibre producer in the world.
Khalaf notes that the specialist nature of these funds means they aren’t the cheapest: ‘A typical active fund costs around 0.75%, and several of these funds charge considerably more than that.’
Looking forwards, he concludes: ‘With the race for clean energy really taking off in recent years as fears over climate change have heightened, it’s a good bet that conditions in the next ten years will look more favourable for these funds than the last ten years,’ he adds.
FUND IDEAS FROM INVESTING ANALYSTS
AdrianLowcock, Willis Owen
Pictet Global Environmental Opportunities: Pictet are experts in investing in niche areas of the market. They have a fairly risk-averse approach looking at companies with strong cashflow and are defensively positioned and businesses which have strong balance sheets. Companies in which the managers invest must operate within the ‘safe operating space’ where human activities can take place safely. The portfolio is around 45-60 stocks with 10 per cent in renewables.
Royal London Sustainable Leaders Trust*: Mike Fox is a very experienced investing in sustainability. He looks for companies which have a positive effect on human welfare, quality of life and the environment. So companies he invests in are involved in the manufacture of products, industrial processes or services which improve the environment and enhance human safety and health.
Chris Salih, FundCalibre
VT Gravis UK Infrastructure Income: It invests in investment trusts, so you get access to a number of them and the manager gets to worry about the discounts and premiums, not you. It also passes on a high level of income from the trusts. It currently has 16 per cent of the fund invested in wind power and 18 per cent in solar power.
Ninety One Global Environment**: Launched a year ago, this fund has a unique approach of only investing in companies that are contributing to the decarbonisation of the world economy. The portfolio has complete conviction, with just 20-40 holdings, and is set to benefit from the massive tailwind of the some $2.4 trillion of annual spend required to meet global temperature goals. Its top holding is Vesta Wind Systems, for example, the Danish manufacturer of wind turbines.
Jason Hollands, Tilney
WHEB Sustainability: Among broader ESG funds, this focuses on themes such as resource efficiency, sustainable transport, environmental services and cleaner energy. WHEB Asset Management is a boutique group focused on sustainable investing and so this fund isn’t just one of many funds run by a large business. It’s what they live and breathe.
Pictet Clean Energy: Among specialist funds more narrowly focused on clean energy stocks, this one of the best performers.
* This did not appear in our performance table because we judged it a generalist ESG fund. It has returned 28.4% in total over the last three years with an ongoing charge of 0.78 per cent.
** This did not appear in our performance table as it is less than three years old. Ninety One Global Environment has returned 39.5 per cent with an ongoing charge of 0.92 per cent.
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