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.
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.
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.
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.