Funds that have holdings in electric vehicle (EV) manufacturers should have performed extremely well over the last 12 months, all other things being equal. Pure EV manufacturers such as Tesla and NIO have rallied 686.7% and 1,406.2% respectively, despite a recent correction. Meanwhile, even traditional vehicle manufacturers with big EV plans — such as General Motors and Ford — are up 149.3% and 181.1%, respectively.
The Global Environment Fund, which counts electrification of transportation as one of its investment themes despite having zero exposure to EV manufacturers, has performed considerably well too.
In the six months to Jan 31 this year, the fund has returned 38% versus the benchmark index’s 17.2%. The fund benchmarks itself against the MSCI All-Countries World Net Return (MSCI Global Environment ex Software and Services ex Real Estate ex Mortgage REITs 10/40 Net Return pre Oct 31, 2019).
In the past 12-months to the same date, the fund has returned 52.4% against the benchmark’s 17%. Since its inception in 2019, the fund has returned 34.2% versus the benchmark’s 11.7%. Even with the initial charge of 5%, the fund has managed to outperform the benchmark index with double digit returns across all three periods.
Graeme Baker, who co-manages the fund with Deirdre Cooper, says the outperformance can be attributed to the fund’s investments in companies supporting the EV manufacturing value chain. For instance, Wuxi Lead Intelligent Equipment is the fund’s third largest holding at 6.3%, according to the January 2021 factsheet. The Shenzhen-listed company is a manufacturer of new energy equipment. Wuxi Lead’s share price has more than doubled in the 12-months to Jan 31
The fund is also invested in Aptiv, an auto parts company headquartered in Dublin. The New York Stock Exchange (NYSE)-listed company is the fund’s eight largest holding at 4.7%. Aptiv was up 57.6% in the 12-months to Jan 31.
Global Environment Fund’s two other investment themes — renewable energy and resource efficiency — have also played their part in the outperformance. Baker says some of the fund’s top performers come from companies that operate in both spaces.
Among renewable energy companies whose share price has surged in the last 12 months is Nextera Energy. The electric utility company generates one of the world’s largest output of solar and wind energy. The NYSE-listed company is the fund’s top holding at 7.3%.
Companies under the resource efficiency theme — like Waste Management — have also done well. The NYSE-listed company that provides waste services is the fund’s second highest holding at 6.6%.
Strict carbon emission scopes
The Global Environment Fund is run by Ninety One, which up till early last year was known as Investec Asset Management. The fund aims to achieve long-term total returns from investing in companies that operate in services, infrastructures, technologies and resources related to environmental sustainability. It is now available to Singapore retail investors after it was launched here in January.
Baker says the decarbonisation trend is picking up pace. He notes that policies and initiatives are starting to be drawn up following The Paris Agreement, which became effective in 2016. The agreement aims to limit global warming to well below two, preferably to 1.5 degree Celsius, compared to pre-industrial levels.
In 2019, the EU has committed to zero net emissions of greenhouse gases by 2050. Late last year, Chinese President Xi Jinping pledged at the UN General Assembly that China will achieve carbon neutrality by 2060. This year, newly elected US President Joe Biden announced a US$2 trillion ($2.6 trillion) budget over four years to spend on green infrastructure.
Baker reckons the electrification of vehicles, renewable energy and resource allocation are themes that will benefit from the increasing decarbonisation trend. “Over time, we believe this to continue growing, as more companies [and] solutions are being introduced to the market as we move along this transition pathway. The pressure for the global economy to decarbonise continues to mount,” Baker tells The Edge Singapore in a recent interview.
“This is a focus strategy with a very long-term investment horizon. We are trying to invest in the winners from sustainable decarbonisation. We are trying to find those leaders that have structural growth, sustainable returns on capital and competitive advantages,” he adds.
So, why does the fund not have any exposure to EV manufacturers? Baker says this is because none of them meet the fund’s strict investment criteria to filter out companies that do not have sufficient carbon avoidance.
As he explains, the first scope bars companies with direct emissions that do not meet the fund’s carbon avoidance threshold. Such emissions could be from owned or controlled sources, such as fuel burned on site or owned vehicles. The second scope weeds out companies with indirect emissions that do not meet the fund’s carbon avoidance threshold. Such emissions could be brought about by the generation of purchased energy.
The final scope removes companies with further indirect emissions that do not meet the fund’s carbon avoidance threshold. These further indirect emissions refer to those generated from supply chain elements or those of the products once they are sold or used.
“When we use this [extremely] strict bottom-up process, it’s [ridiculously] hard to find any of the auto OEMs coming through at the top of that idea generation screen. We’re struggling to find those OEMs [now, though] this could change over time,” says Baker.
Limitations?
Does this not, then, illustrate the limitation of the fund’s ability to generate higher alpha? Baker thinks otherwise. He says the fund has identified a universe of about 700 companies that are most likely to benefit from sustainable decarbonisation. This universe is large, diverse and relatively undiscovered, and currently accounts for only 7% of the MSCI All-Countries World Index’s weight, he adds.
For instance, Xinyi Solar Holdings, one of the fund’s holdings, had contributed to the outperformance, says Baker. The Hong Kong-listed manufacturer of solar energy products produces about a third of the world’s solar glass — and it is doing so at a lower cost than some of the competing producers. Furthermore, the company can produce extremely thin solar glass too, he points out. “So, we believe the company has strong competitive advantages and is able to generate significant return on capital relative to its peers,” he says.
Vestas Wind Systems is another example, says Baker. The Nasdaq-listed company, which had performed well last year, is the world’s leading wind turbine equipment producer. Besides its leading market share, he points out that the company also has a strong services business, which generates higher margins.
Ørsted, one of the world’s largest offshore wind energy developers, is also a winner. Baker highlights that the Copenhagen-listed company has competitive advantages to develop offshore wind farms given their experience and know-how. Moreover, their data collection allows them to reduce operational and maintenance costs, he adds.
Only 26 holdings
Altogether, the Global Environment Fund owns shares in 26 companies now. A significant portion of these comprised industrial, IT and utility companies at 36.9%, 27% and 19%, respectively. From a geographic perspective, the top three allocations are the US, Europe excluding the UK and emerging markets at 32.3%, 28.4% and 24.3%, respectively.
The fund’s top 10 holdings constitute 53.8% of its entire holdings. Is there a concentration risk, given how the high growth nature of such emerging themes are often laced with plenty of volatility?
Baker thinks the fund’s current number of holdings is sufficiently diversified to minimise volatility of the fund’s performance. He explains that the volatility of the fund is “in line” with that of the benchmark index. He adds that some of the holdings have “good defensive qualities” that reflect lower volatility to their peers.
What about the risks arising from the unresolved tensions between the US and China? Although the US has a new administration under President Biden, the rivalry between both superpowers is likely to continue and increasingly revolve around technology.
Baker seems unfazed by this. He says he meets with the management of the companies that the fund is invested in on a regular basis to stay on top of issues such as this. Thus far, he says he has not seen any “significant” impacts to any of the fund’s holdings.
“It is a matter of continuing to engage and keep an eye on announcements. We try to understand different scenarios of how different decisions and announcements, including regulatory, could impact the companies that we’re investing in. We run different scenarios and try to understand how that may impact long term growth or intrinsic value,” he says.
