Wealth managers warming to sustainable energy funds

During the financial crisis, sustainable energy suffered from neglect, as a result of the huge set-up costs required. With governments unable to provide subsidies, renewable energy became an expensive luxury, and wealth managers turned a blind eye to the sector. But over the last couple of years, considerable improvements in technology and lower costs are making sustainable energy an attractive proposition to wealth managers once again.

Total investments in renewable energy had a record year in 2011 at $260bn (€210bn), compared to around $50bn in 2003. M&A activity was also strong, with a total disclosed value of $42bn, with large diversified industrial companies such as Siemens, ABB, Schneider Electric, GE and Veolia, developing, adopting, or acquiring proven clean technology solutions.

“We believe that energy efficiency has bright prospects for the coming years,” says Xavier Chollet, senior investment manager of Pictet-Clean Energy Fund.

Since 2000, approximately 400 clean tech funds have raised $65bn in venture capital, expansion capital and project equity investments, according to research by Sustainable Asset Management. Shifting consumer preferences, environmental pressure, favourable demographics and energy and resource security are some of the reasons energy experts cite will lead to a shift towards renewable energy.

As several oil exporting countries in the Middle East and Africa suffer from turmoil and government uncertainty, the world’s biggest economies have a greater interest in obtaining energy independence.

“The world is spending about 8 per cent of its GDP on energy, a historically high and unsustainable level that we have not seen since the oil crisis in the late seventies and early eighties,” Mr Chollet says. “We believe this will accelerate the focus on energy efficiency, which leads to rapid cost reduction and generally does not depend on subsidies.”

For the private bank, sustainable energy breaks down to three areas, namely carbon free energy, low carbon energy on the supply side and energy efficiency on the demand side. Pictet’s fund invests in the ongoing transition of the energy mix towards clean energy and away from oil and coal. The fund currently has a low exposure to pure renewables, citing fundamentals are weak in the sector, while it has high exposure to natural gas and energy efficiency.

Energy efficiency is a vast area, encompassing fuel efficiency in transportation, energy efficient electric motors in factories, efficient air conditioning in buildings, efficient lighting and anything that could help achieve the same end result by using less energy.

Renewable energy is forecast to be the fastest growing energy sector through to 2035, according to the IEA World Energy Outlook 2011. However, renewable energies such as wind and solar mostly depend on government subsidies until they can be viable without outside help. Prices for solar panels have fallen by 45 per cent, while wind turbine prices dropped by 6 per cent, according to Bloomberg New Energy Finance. Nevertheless, given the slowdown in the world economy, particularly in Europe, an important area for wind and solar, wealth managers believe it is best to have low exposure.

“In the near-term, the oversupply and subsequent margin erosion in the renewable energy equipment sector has led us to holding a reduced weighting of these companies,” says Robin Batchelor, fund manager for BlackRock’s New Energy Investment Trust. “This oversupply has resulted in lower equipment costs that benefit producers of renewable power. As a result, we have a higher weighting in those renewable energy power producers.”

The fund is playing the sustainable energy theme through a range of global equity subsectors that cover energy efficiency, enabling energy and infrastructure, alternative fuels, renewable energy power producers and renewable energy equipment manufacturers. It gains exposure to renewable energy by direct investment in companies or through special investment trust companies.

The renewable energy investment theme is being driven by concerns over securing adequate and cleaner sources of energy, says Mr Batchelor. “In any one year or in any one geography, the growth rates in these sub-sectors vary, and this is reflected in the active changing of positions within our portfolio of holdings.”

“We definitely underpin a view that renewables is not a place for cautious investors to be,” says Andrew Haigh, head of client propositions at Coutts. “There are no or a few dominant players and there are huge risks.”

The private bank is research-focused at the moment, looking for opportunities in sustainable energy, clean-technology, and renewables. “The bulk of our focus is on cautious investors and low-cost and risk,” he explains.

Sustainable energy is a rapidly moving sector where you have to know what the underlying technologies are and have the technical expertise to invest in the larger players and see how the investment is going to fit, says Mr Haigh.

“It is a kind of activity for investors that are not overly short-term focused,” says Kenneth Heinz, president of Hedge Fund Research, which compiles a sustainability index that posted a gain in the first half of the year to June of 137 basis points and in 2011 also posted a gain of 6 per cent.

“For intermediate to long-term investors, I think there are considerable opportunities in all of the assets in the alternative energy space,” he says. “The risk in the short-term is that it can be very unpredictable.”

Small, unprofitable companies are a risk, believes Mr Heinz, as was highlighted last year when several products in the solar energy space failed. Extremely high valuations for equities are another risk, he warns. “I think there are compelling opportunities in this space for funds willing to take the risk. It may see a high note of failure in order to get one successful pay-off for investors.”

However, the sustainable energy theme is a key trend and investment opportunities in the area are here to stay, says Luca Concone, chief executive of the newly-launched Real Asset Energy Fund (RAEF). He says that long-term prospects for sustainable energy are excellent because the technology is still at an early stage. “It is now recognised as the only ethical and green way to help poorer countries develop their energy infrastructure,” he says. “As renewable energy storage technology develops, we will not need to burn fossil fuels to satisfy peak demand.”

RAEF will begin investing next year by acquiring power plants once their construction phase is complete and managing them until the end of their industrial life, typically 20 years. The investments will be focused mainly on fuel-independent, mature technologies, such as wind and solar, which have stable revenues and limited operating complexity.

According to the fund, renewable energy is a safe and stable industry, with no oil spills, very little price fluctuations and no health issues. In contrast, if fossil fuels are made to pay the real cost for all the damage they do to the environment, subsidies and incentives can be eliminated in five to 10 years time.

It is not just private banks taking an interest in sustainable energy, says Mr Concone. “Large family offices are very interested in our offering as this investment is completely uncorrelated to the financial market and distributes a high yearly yield with a very low risk,” he adds.

A belief that businesses will become increasingly clean, and efficient, along with growing concerns over climate change and volatile prices in fossil fuels led Impax Asset Management to venture into sustainable energy. The fund manager is a specialist in environmental markets, investing in broad areas, such as energy efficiency, renewable energy, water, pollution control and recycling.

Over the past 14 years the sector has been evolving, says Bruce Jenkyn-Jones, managing director of listed equities at Impax. “All these themes have spread across the globe over the past 10 years. What was initially a very European story, then saw the US get involved, and in the past four to five years China and India are also investing resources in infrastructure and environmenal protection,” he says.

Fund managers are increasingly focusing on Asia and other regions with currently almost 50 per cent of the funds in the market active in the region. These governments have set ambitious environmental targets and are further stimulating demand.

“In China and India the investment challenge is quite significant. We are looking at emerging market economies, developing countries economic growth and development prosperity,” says Ben Caldecott of Climate Change Capital, an investment manager and advisory group specialising in the opportunities generated by the transition to a low carbon economy.

Tackling environmental problems by investing in clean, secure renewable energy and at the same time creating good returns for investors is the investment manager’s goal. “We have a strategy that we sometimes own a company or own an equity stake in a project. It all depends on the sector of the technology and the fund strategy,” says Mr Caldecott.

A rising population, increasing urbanisation, climate change and limited resources will mean demand for renewable solutions and services is likely to continue. Energy consumption is likely to be as much as 40 per cent higher in 2030. Favourable environment policies and improvements in clean energy technology are likely to make sustainability increasingly important over the coming years.

Since 2000, approximately 400 clean tech funds have raised $65bn in venture capital, expansion capital and project equity investments, according to research by Sustainable Asset Management

Kenneth Heinz, Hedge Fund Research