Investing pragmatically in renewables

David Jane
Premier Miton Macro Thematic Multi Asset Team

Unpackaging long term themes

Our investment process has two principal threads. One is macro ideas and the other long term thematic drivers. We use many of these Perspective notes to discuss the macro environment and less often we discuss our thematic positions. Perhaps that is because the macro environment is forever changing throwing up regular opportunities to make money and write commentary, whereas our thematic positions are much more consistent over time.

Energy transition has been one of our long-term themes for over a decade. Nevertheless, like all of our themes, exposure has grown or shrunk as appropriate given market conditions at the time. The investment case has been fairly consistent, and in fact may have become stronger over time. This case is based on three pillars, technological advancement in renewable energy, public and political concern regarding reliance on fossil fuels and the financial support provided to the industry. Space is too short to discuss each of these here.

 

On trend
Here are three ways we have gained exposure to this theme:

  • Renewable oriented utilities
  • Renewable equipment suppliers
  • Tertiary industries which benefit from these trend

 

Each of these areas comes into focus at different stages of the economic cycle. During ‘risk -off’ periods, where markets are concerned about economic activity, in our view utilities are useful for their defensive characteristics. We have seen sessions of ‘risk off’ investor behaviour for most of this year as markets have sold off and became concerned about the potential to fall back into recession. 

At times when interest rates are falling, in particular long term bond yields, the high growth equipment suppliers come into their own. This is because their high growth rates mean that profits are anticipated to arise far into the future, and therefore like all growth stocks they are long duration assets. This was obviously the case for most of the last decade.

 

Electric avenue
More recently it has become clear that companies further up the supply chain have a role to play. Electricity storage requires huge amounts of minerals such as lithium and cobalt. Wind farms and solar arrays require copper, plastics, steel, and other minerals such as rare earths. Nuclear power will require large amounts of similar materials and scarce engineering expertise.

All of these areas have not only been ignored, in many cases they have been actively discouraged over recent years as not being green enough. Investments in these areas often have value characteristics providing a useful complement to the growth characteristics of the more high-tech areas or the defensive characteristics of the utilities.

Over time we have been able to flex our exposure to this, and many of our other themes, to adapt to changing market environments. In this way, we can fully benefit from periods when growth is heavily in favour, such as 2020, but pivot to a more defensive stance as the economy deteriorates, such as earlier this year. More recently we have exposed our Funds to much more value orientated investments, whilst still having investments in the long-term growth potential of the renewables theme.

 

Building momentum
As ever the key for us is pragmatism, we are committed to our macro and thematic approach to idea generation, but always pragmatic as to how we gain exposure. In particular, we take momentum into account when deciding what areas to emphasize, if an area goes out of favour, such as the growth factor at the moment, we will reduce or fully sell and replace with investments that are currently generating good returns. In this way, while our long-term themes may have attractive long-term growth potential, it doesn’t mean our fund must have a permanent ‘growth style’ bias when growth as a factor is out of favour.

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Risks

The performance information presented on this page relates to the past. Past performance is not a reliable indicator of future returns.

The value of stock market investments will fluctuate, and investors may not get back the original amount invested.

Funds that invest in specific sectors or industries may carry a higher risk and display greater volatility than funds with a more diversified portfolio.

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IMPORTANT INFORMATION:

For Investment Professionals only. Not for onward distribution. No other persons should rely on any information contained within this document.

Whilst every effort has been made to ensure the accuracy of the information contained within this document, we regret that we cannot accept responsibility for any omissions or errors. The information given and opinions expressed are subject to change and should not be interpreted as investment advice.

Persons who do not have professional experience in matters relating to investments should not rely on the content of this document.

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Financial Promotion issued by Premier Miton Investors. Premier Portfolio Managers Limited is registered in England no. 01235867. Premier Fund Managers Limited is registered in England no. 02274227. Both companies are authorised and regulated by the Financial Conduct Authority and are members of the ‘Premier Miton Investors’ marketing group and subsidiaries of Premier Miton Group plc (registered in England no. 06306664). Registered office: Eastgate Court, High Street, Guildford, Surrey GU1 3DE.

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The information contained on this website does not constitute an offer or solicitation to sell or purchase shares in the funds or portfolios or to provide you with other products or services. Any application or investment must only be made on the basis of the relevant documentation of the investment, such as, for example, terms and conditions. The information on this website does not constitute any investment, tax, legal or other advice. Persons who do not have professional experience in matters relating to investments should always consult with an independent financial adviser before making an investment decision. Any opinion expressed on individual funds, services or products represent the views of the individual at the time of preparation and should not be interpreted as a personal recommendation to buy or sell or otherwise trade all or any of the investments that may be referred to.

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The content of the pages of this website is for your general information and use only. It, and the products and services described within it, are subject to change without notice. We shall not be liable to you, or any third party, for any amendment, modification, suspension or discontinuance of any product or service described on our website. Neither we, nor any third parties, provide any warranty or guarantee as to the accuracy, timeliness, performance, completeness or appropriateness of the information and materials made available on this website.

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