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A sunny offshore investment

Simon Brown shares his solar ETF pick and thoughts on the industry.

MARC ASHTON: Welcome to the Moneyweb Offshore Investing podcast, today I’m joined in studio by Simon Brown from JustOneLap. Simon, thanks for joining us

SIMON BROWN: Thanks, Marc, pleasure.

MARC ASHTON: Simon, we’re looking at solar today, we’ve all fought our way through traffic this morning, we’re having our own energy crisis here but interestingly, having a look at the South African renewable energy market, and particularly the solar space we’ve actually had some really interesting stories to tell. What we have noticed though is that there is no way for local investors to participate in those shares in terms of local exposure to those companies but there are some interesting things happening overseas and you’re able to participate in solar companies based offshore. Give us some ideas of how you could participate in the sector.

SIMON BROWN: There are a couple of them. The one that I really came down to is called the Solar Energy ETF, its code is KWT, issued by a company called Van Eck Global, a name many probably have not ever heard of. They go under the brand of Market Vectors ETF; they’ve been around since the 50s actually. But that’s the beauty of going across to the New York Stock Exchange: there are huge amounts of choice in the ETF space, over 1200 ETFs in the US alone. If you subscribe to solar – and we can touch on that in a moment – how do we get exposure to it and particularly with new innovations like this? You want to be careful about going and buying one company because they’ve invested their way into a certain idea, concept, whatever and it might just not work. These are start-up technologies, start-up companies in a sense and they might have been around for ten or 20 years but that’s
start-up in the big picture compared with healthcare or property or something. So the ETF then gives you that broad base of companies underpinning it.

MARC ASHTON: Give us some idea in terms of the exposure to the individual companies, are we looking at one big name in the sector, is there a variety, what does the weighting look like?

SIMON BROWN: There isn’t one that I recognise, to be honest. The biggest is SolarCity Corp, it’s at 10%, we’ve got SunEdison at 8.5%, First Solar at 8% – there are some fairly heavy weightings from those particular stocks. Now what Van Eck has done is they’ve constructed their own index in this space because there wasn’t a solar index. Out of the total, the top 15 stocks are about 77% of the holding, which is chunky, and then the remaining constituents obviously the other 25% or so. These are not companies that spring to mind I think in part because when you say solar power we all know what solar power is; when you say who does it, we all just scratch our head and say we haven’t got a clue. It’s that incredibly new space that’s also seen leaps and bounds in technology in the last couple of years.

MARC ASHTON: When I think of solar I think leaders in the space are probably based in the US. What is the weighting geographically: is this a US-based product?

SIMON BROWN: It’s US-based in the sense that it’s domiciled in the US. But if you look at the companies making it up, 38% are US, which I agree with you, I thought that was surprisingly low. I would have thought that would have been closer to 50% or 60%. The next biggest is China at 33% – so big exposure into China. Taiwan is at 15% and then Norway, Switzerland, Canada. Surprisingly Germany is only at 1% – they’re really big in solar but I suppose the point is that the German solar industry might have been buying their kit from China or America.

MARC ASHTON: China is interesting. We’ve looked at a lot of the big issues that are coming through there around the shadow banking, the debt covenants that are being breached. Solar is one of those sectors where there has been a lot of money pumped in; there’s a lot of question marks about the sustainability of these businesses and, in fact, some of the big collapses are amongst the solar sector. Is this a risk that investors are going to face if they look at this product?

SIMON BROWN: The short answer is yes and I suppose if you invest into something like solar, you’re taking a higher risk than if you buy a property stock or a retailer or a bank or something like that. This is out there on the edge – it’s not on the edge as some but it’s certainly there. China is your one risk, as you say, defaults and the like, the issues around that. Will the Chinese government let them go down? In some cases and I think perhaps in this space [it’s] more likely to step in but I do not think that that’s a guarantee. There is no, I wouldn’t even say an implicit guarantee from the Chinese government. Your other risk is that some of these companies go down a technological route, which doesn’t work, or have a great idea and it doesn’t pan out, so there is risk there and we’re getting the reward, the return last year was up almost a third over the course of the year. We’re getting the reward at the point. My sense from solar is that we’re kind of at that tipping point, we’re going to be there for a while, where its popularity and its acceptance and its proof of concept is really starting to kick in.

MARC ASHTON: So I listen to what you’re saying here and I think that it’s really interesting: it gets me excited about start-up technology. Solar is still a long-term play though if we think about renewable energy. Do we see this as something that’s just fun, is it like a social media type platform where you’re only looking at start-up or is it actually something that’s going to be a long-term sustainable … effectively the utilities that we’re familiar with now in the US, is this what we’re going to be looking at 20 years from now?

SIMON BROWN: I think it is, I think clean energy is the future of energy, the trick with clean energy is: there are still issues with wind power, wave power we haven’t worked out, hydroelectric is great but you need the water sources and the like. Solar needs sun, we have sun everywhere, well, okay up in the North Pole we don’t but there’s a lot of sun out there.

We’ve got issues for example, there are issues around the cleanness of energy. People call the Tesla a clean car, a green car, but it’s not because you plug a power point into it and that power is being made by coal or nuclear and that’s dirty. Solar is completely clean. Germany is saying it wants to move away from nuclear power and, in fact, Germany is one of the biggest users of solar power. What we’ve also seen is leaps in technology. In 2008 when load shedding started I looked at solar panels, the PV panels and I’ve looked again this year and what we’re seeing is a doubling in output and a halving in price, so my bank to buck has gone up four-fold. That’s going to continue to happen. Over the next decade or two that will start to level off but solar is almost getting to that point where it can start to compete with the non-clean and that’s a huge issue for them and that’s why I think of the clean energies, of the renewables, I think it’s about solar.

MARC ASHTON: For listeners who missed the name of that ETF.

SIMON BROWN: So the name of the ETF is the Solar Energy ETF, it’s by Van Eck Global and the code is KWT, trading in New York.

MARC ASHTON: Can people trade this via the Standard Bank Webtrader platform?

SIMON BROWN:  Yes, they go into Webtrader and they type in KWT and they will see it will pop up and prepopulate for them.

MARC ASHTON: Simon, thanks for joining us in studio.

SIMON BROWN: Always a pleasure.

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