Investing in Alternative Energy and Sustainability have become in the recent years an investment Megatrend. Investors are looking for investment options like the alternative energy equity funds that not only give them great rentability but also that are good with the environment and are socially responsible. Asset managers are becoming more conscious about the effects of their investments in the society and the world.
We have picked three alternative energy equity funds from BlackRock, Pictet and Guinness to understand the strategies and allocations of the fund managers when taking in consideration sustainability and rentability and better returns in 5 years annualised as per Morningstar data.
Returns Alternative Energy Equity Funds
Source: Morningstar 16/07/2021
The first of all the Alternative energy equity funds and the one with a better returns 5 years annualised is:
BGF Sustainable Energy Fund
Alastair Bishop, Director of the Natural Resources equities team within the Fundamental Equity division at BlackRock
The BGF Sustainable Energy Fund seeks to maximize total return, by investing globally in companies which are benefitting from or enabling the transition to a lower carbon economy. The three key sub-sectors within the fund are clean power, energy efficiency and clean transportation. We believe an active approach is key in accessing this theme as it requires deep forward-looking insight to identify those companies set to emerge as beneficiaries. We have a flexible investment style, always looking for growth, value and turnaround stories, and would therefore, not describe ourselves as having a particular style bias. We also believe that strong Environmental, Social and Corporate Governance (ESG) is positively correlated with investment performance and embed these considerations into our investment process.
- The BGF Sustainable Energy Fund is the largest fund within its Morningstar peer group.
- The breadth and expertise of our research capability to identify companies with pure exposure to the sustainable energy theme.
- A disciplined portfolio construction process that is risk optimised to ensure investments are diversified and reflect the portfolio managers’ highest conviction ideas.
- The ability to leverage the broader fundamental equity platform of more than 200 investors globally.
We believe that markets are not fully efficient and through our research, we can find companies being undervalued by the market. We do not believe that simple, broad exposure to hundreds of companies connected to a theme is optimal as with disruptive themes, there are typically many losers and a few big winners. As such, we feel the best way to play this theme is through a concentrated, focused portfolio targeting only those winners.
- We see the sustainable energy theme accelerating with economic stimulus post COVID likely to be focused on green industries as evidenced by the EU Green Deal.
- Sustainable Energy is supported by the acceleration of the transition to a lower carbon economy. Renewable energy costs for onshore wind and solar PV, are now at grid parity in certain markets and such power generation now represents the most economic technology choice, which is driving rapid adoption. We see similar cost competitiveness trends in other areas such as energy efficient lighting and energy storage solutions in automotive electrification.
- The path to a lower carbon global economy is forecast to disrupt many industries and business models. However, this evolution is also expected to create remarkable opportunities. To quantify, the International Energy Agency estimates that over $20 trillion will be invested in the sector through 2040, an average of nearly $1 trillion per year.
- The BGF Sustainable Energy Fund is positioned to capture such industry shifts and reap the benefits from this transition. Within transportation, the tighter CO2 emissions limits in Europe mean that 2021 is set to be a key year of transition for the auto industry. New electric vehicle models from the major global auto manufacturers enter showrooms with significantly improved range and design.
- We believe that the scale of the growth opportunity for the sustainable energy sector as a whole over the coming years has been under-appreciated both as a play on capital allocation and attractive long-term investment exposure.
The second with best annualised 5 years returns is:
Guinness Sustainable Energy Fund
Jonathan Waghorn and Will Riley, Fund Managers and The Guinness Specialist Team
The Sustainable Energy Fund was relaunched at the end of 2018 by its managers, Jonathan Waghorn and Will Riley (with their extensive energy investing experience from managing the successful Guinness Global Energy strategy), with a new strategy to harness the investment returns from improving economics associated with both demand and supply themes in energy transition.
The team sees opportunity driven as much by improving economics as climate concerns with multiple investment themes that are likely to see secular growth for the next 20-30 years.
The fund’s exposure to a range of subthemes in the energy transition space means that the fund captures good exposure to more quality cyclical as well as more defensive quality subthemes with a smoothed risk return profile.
The investment process incorporates 50% top-down subsector allocation and 50% bottom-up stock selection, with a thorough due diligence process centred around detailed financial models constructed by the team, while company meetings and site visits also make up part of this process.
ESG factors are incorporated into both the top-down and bottom-up stages of the investment process using (respectively) the team’s in-house global energy transition model, qualitative ESG assessment and quantitative ESG scorecard methodology.
The portfolio is constructed with 30 equally weighted positions, which balances concentration and stock-specific risk. It also imposes a structural sell discipline: an existing position must be sold to purchase a new holding, avoiding a long tail of increasingly small positions.
The result is a quality portfolio exposed to attractive growth sectors trading at a justifiable c.20% premium to market multiples (2021e) and stronger historic and future EPS growth.
Although 2021 has seen underperformance from energy generation names and some of the higher multiples combing down in solar, the fund has delivered 158.4% since the relaunch of strategy on 31.12.18 vs 67.3% for MSCI World (Class Y USD). The fund therefore outperformed by 91.1% (Class Y USD, to 30.6.21).
By investing in companies engaged in the generation and storage of sustainable energy and the electrification of energy demand, the strategy is impact-aligned ‘by design’ and prioritises returns whilst delivering concentrated exposure to companies playing a key role in global decarbonisation, providing a positive environmental solution for investors’ portfolios. The fund is aligned to the World Bank’s nine principles of impact investing and further details are available in the fund’s Impact Report. The fund is classified as an Article 9 fund under SFDR and is available with USD, EUR and GBP share classes at 0.70% OCF as of 30 June 2021 (Class Y Shares).
The Guinness Sustainable Energy Fund is positioned to benefit from the many opportunities associated with the sustainable energy transition.
The third with best annualised 5 year returns is:
Pictet-Clean Energy EUR
Xavier Chollet, Fund Manager Pictet Clean Energy
Traded companies, a necessary complement in sustainable infrastructures
Real assets, as power grids and hydroelectric plants, tend to provide stable cash flows and protection against inflation. In addition, they can offer uncorrelated returns to equities or bonds. This is why institutional investors with long-term liabilities have been allocating capital to infrastructure for decades and already accumulate more than a trillion in these investments, according to the OECD. Specifically, they allocate approximately 6% to infrastructure, the bulk in privately owned assets. It has proven to be a success, with total returns of almost 14% annualized over the last decade.
Moreover, in a recent survey, more than 80% expect clean energy to be the main source of infrastructure investments for next ten years. It should be noted that the US, Europe and China and an increasing number of large multinationals have committed to ambitious CO2 emission reduction targets in the post-Covid era. According to the International Renewable Energy Agency, to meet climate targets, investments in the U.S. energy system between 2016 and 2050 must increase 16% over what was expected.
So a wide range of renewable and sustainable assets -wind and solar power plants, renewable electricity grids, electric vehicle infrastructure and the construction sector- can experience rapid growth, considering that already in the year before the pandemic clean energy accounted for the majority of private sector infrastructure investment, 40,000 million dollars -40% of total-. Corresponding investment opportunities in electrification and infrastructure could add up to $26 trillion by 2050.
The fact is that, as the world accelerates efforts to be more efficient in resources and decarbonize, listed companies specialized in clean energy and sustainable solutions, are increasingly complementary and an alternative to private assets, where valuations in private capital infrastructures have increased eightfold since 2000.
However, listed companies with infrastructures facilitate access to a wide range of industries and dozens of subsectors, for a more diversified portfolio. In addition, they provide liquid investments, with which to easily reallocate assets with the economic, regulatory and financial developments. Listed companies are required to publish quarterly results and investors can monitor their investments frequently. In addition, in the face of increased public pressure, they tend to show better results in ESG (environmental, social and governance) metrics. Since 2005, listed utilities have withdrawn nearly 40% of their coal-fired power plant facilities and only 10% of the planned new coal-fired power plant capacity in Europe is from listed utilities.
In addition, traditional IPOs in clean energy appear strong in some regions. It is estimated that in clean energy SPACs special purpose acquisition companies), average business value if 1,800 million dollars.
- Population and GDP growth putting a significant strain on today’s energy supply
- Economics as sustainable sources of energy will be cheaper than the incumbents
- Climate change leading the world to reduce carbon emissions via cleaner energy
- Pollution forcing governments to drive air pollution out of cities via cleaner energy
- Energy security as sustainable energy sources, which are more evenly spread across all countries, facilitate lower reliance on energy imports
If you want to read more articles about alternative energy equity funds, sustainable investments and ESG check our ESG section.