RYK VAN NIEKERK: The Ninety One Environment Fund was recently registered for sale to South African investors. The fund invests globally primarily in companies contributing to or benefitting from positive environmental change. This will include companies offering services, infrastructure, technology and resources related to environmental sustainability. The fund size is around $160 million or nearly R3 billion. Joining me now is Graeme Baker of Ninety One, he is one of the fund managers of the Ninety One Environment Fund. Graeme, thank you so much for joining me. It is an interesting fund and it is relatively new to the broad ESG [environmental, social and governance] universe. Is there a big demand from investors for such funds?
GRAEME BAKER: Hi Ryk, good to speak to you. We’ve seen a significant increase in interest in our strategy, which is the global environment strategy focusing on sustainable decarbonisation, but we are seeing a trend around the world and hearing from many other people that the demand for sustainable and ESG focused investment products is growing. I mean, one of the key things we want to make clear though is that ours really is a pure decarbonisation strategy, but we also have ESG and sustainability integrated throughout the entire investment process.
RYK VAN NIEKERK: Let’s talk about the decarbonisation strategy. What exactly is it and what do you want to achieve?
GRAEME BAKER: It’s quite clear that climate risk is one of the greatest long-term risks we face as a planet and as a global economy, and prior to Covid-19 the World Economic Forum believed all five of the biggest risks to the global economy were climate-related risks. Now obviously that’s changed in the short and medium-term with Covid-19, a really serious risk, but we think this is a significant long-term risk that is not going away. And the Intergovernmental Panel on Climate Change [IPCC] have stated we have less than 12 years to act to save the planet and to keep global warming below two degrees Celsius.
They have stated we need to spend approximately $2.4 trillion per annum as a global economy, out to 2030 and beyond, to decarbonise the planet. And this is exactly what we are trying to focus on with the Ninety One global environment strategy.
What we’re focusing on here, there are three key themes. The first is ‘greening the grid’ and that’s really looking at renewable energy. And here we look across the entire supply and value chain and once you’ve greened the grid you need to electrify. So we’re looking at the electrification of buildings, transport and industry. And then finally to stay within the two degrees warming scenario or get anywhere near it. As a planet we all need to start consuming fewer resources and less energy.
So they’re really the three key subsectors and themes that we’re looking at within sustainable decarbonisation, renewable energy, electrification and resource efficiency.
Now we think this is an exciting structural growth opportunity and that’s our three key reasons to invest in this strategy. Structural growth opportunity directly linked to sustainable decarbonisation. It’s a great hedge to carbon risk and global investors are structurally underexposed to these companies that are assisting and our other leaders within the drive to decarbonisation.
RYK VAN NIEKERK: Graeme, how big is the investment universe for such a decarbonisation focused fund? How many companies are there you can invest in?
GRAEME BAKER: The first part of our investment universe, of our investment process, is to create a carbon-avoided universe.
And the way we go about that is two steps. The first is to screen the global equity universe on positive environmental revenues. And that’s really trying to find those companies that are directly exposed to the growth opportunity within decarbonisation. We then screen for something called positive carbon-avoided. And really what we’re looking for here is companies that are producing fewer carbon emissions than their peers, fewer carbon emissions than the status quo.
So we’re trying to find the real winners from decarbonisation, as I said, and this gives us a universe of approximately 700 companies and the summed market cap of approximately $6 trillion. So actually we’re finding a large, reasonably well-diversified universe. We’re seeing opportunities across many regions and across the market cap space. And I think one of the key points to mention is that our carbon-avoided universe only makes up approximately 7% of the MSCI [World Index] or country world indices weight. So we think global investors are actually structurally underexposed to this carbon-avoided opportunity.
RYK VAN NIEKERK: Of course investors are looking for good returns. The fund is relatively new, I think it’s just over one year old. How has it, for example, stood up during the volatile few months we’ve just seen? How did it compare with other funds?
GRAEME BAKER: As you say, it has been a very volatile time period during this Covid crisis and continues to be, and actually the fund has performed reasonably well. We have continued to manage to outperform global equities. So we’re just ahead of global equities year-to-date. As I said, we have a diversified cross-decarbonisation.
Really what has helped us to defend the volatile times [is] having approximately 20% of the portfolio in the cleanest, greenest utilities in the world.
A significant proportion of their earnings are regulated and highly defensive and we have seen that come through and act as a good defence for the portfolio during that period.
RYK VAN NIEKERK: Graeme, I’m looking at your fund fact sheet and the top holdings in the fund are NextEra Energy [Inc] and Aptiv plc. Can you tell us more about those two companies?
GRAEME BAKER: Yes, of course, and I think it’s important to point out that the strategy is highly a concentrated strategy. So currently we have holdings at 25 stocks and both Deirdre [Cooper, portfolio manager of the Global Environment fund at Ninety One] and I believe strongly in concentrated portfolios. One, it means all of our decisions are debated and discussed in a very, very strong way. But also it gives us the ability to engage strongly and deeply with all of the companies we invest in and that is key to us from a business management point of view but also from a sustainability and ESG point of view.
Now in terms of the two companies you mentioned, they’re extremely different and the performance drawer during the crisis has been extremely different. The first is NextEra Energy and they are, as I mentioned before, one of the utilities within our portfolio. They are one of the cleanest, greenest utilities in the world and one of the world’s leading wind and solar developers.
And interestingly, given the rapid fall we have seen in the cost of wind and solar, someone such as NextEra Energy is able to buy up coal plants in the US and shut them down and builds new wind and solar plants at cheaper combined CapEx and Opex relative to the older, more expensive Opex of the coal plants. And so we see a great opportunity here with someone such as NextEra Energy who have regulated structural earnings growth of what we see 6-10% per annum out over the long term.
The second company you mentioned is Aptiv and really Aptiv are selling to the auto industry, but they are leaders in the electrification of vehicles and involved in the automation of vehicles. And we see extremely exciting long-term prospects for this business. They’re effectively being valued as an auto components company, but we believe they are one of the leaders in tech, that’s feeding into the future of electric vehicles and autonomous vehicles. And with both of the companies you’ve mentioned, we build intrinsic value models for our companies and during this crisis have seen periods where we think these companies have sold off, especially in the case of Aptiv, have sold off more than we would have expected. And we see the extremely good long-term intrinsic value.
RYK VAN NIEKERK: Graeme, the world economy is in a really interesting place at the moment. The two biggest economies are China and the US and both are not as keen to adopt clean energy technologies and policies. How does that affect the whole investment landscape?
GRAEME BAKER: Yeah, so I think that that’s fair to say when we compare the three key regions for what we’re looking at within our portfolio of Europe, China and the US, that the outcome or the view towards decarbonisation is less clear, but I think it’s also important to mention that China has, during this crisis, extended electric vehicle subsidies and have nine key strategic industries including new energy vehicles, new energy and energy-efficient environmental technologies.
So we actually believe China is starting and have mentioned it before about greening their economy. But do believe it is important. We have seen this historically that a significant proportion of Chinese electricity is coming from coal and if we’re all getting anywhere near a two degrees scenario that that percentage will need to come down. So we’re trying to find opportunities investing in renewable energy but also electric vehicles within China and are seeing lots of opportunities.
On the US side, once again, it is slightly more tricky and as I’ve said, Europe is looking at the forefront with things such as their green new deal. But just going back to the US, we believe the economics of wind and solar have improved so much. For example, if you look at wind and solar and other renewable energy across the world, as I said before, it is really becoming the cheapest form of electricity and economics just make sense. So even if you don’t have support from certain politicians, we believe there are still excellent growth opportunities. And maybe in the short term during this crisis, there will be some horse-trading between Democrats and Republicans around help for the green economy. But this isn’t really a given.
RYK VAN NIEKERK: Absolutely. Just lastly, we are living in a Covid-19 world now. The future will look significantly different from what people would have expected, even a few months ago. Have you adjusted your portfolio in the context of this pandemic?
GRAEME BAKER: Yeah, as you say, it’s been very volatile and it’s been a difficult period. What we have done is we’ve run credit liquidity and balance sheet stress tests on all of our names and actually, these were downside scenario stress tests, and we weren’t seeing any issues from a credit or balance sheet point of view.
We feel we’re pretty well positioned coming into it, we have tweaked around the edges where we have seen more leading companies such as Aptiv with great long-term intrinsic value, sell off aggressively and were adding to some of those names back in March. As I mentioned before, we see very strong defensive characteristics from our utilities during this period as well.
So I think really the key point is that there are lots of near term uncertainties and it’s extremely difficult to predict what’s going to happen in the short term. We are expecting some weak quarters or weak quarterly earnings from some of our more cyclical names, as we do. The structural unity is not going away and we believe this could be a great opportunity for sustainable decarbonisation at compelling valuations.
RYK VAN NIEKERK: We’ll have to leave it there. Graeme, thank you so much for your time. That was Graeme Baker. He is one of the fund managers of the Ninety One Environmental Fund.
Brought to you by Ninety One.