December 3, 2024 • 36 mins
Themes ranging from decentralized energy to nuclear to solar have found fresh footing this year due to secular growth trends such as the acceleration of electrification needs. In this episode of Inside Active, host David Cohne, mutual fund and active-management analyst with Bloomberg Intelligence, along with co-host Breanne Dougherty, head of thematic strategy at Bloomberg Intelligence, spoke with Jonathan Waghorn, a portfolio manager on the Guinness Global Energy and Guinness Sustainable Energy strategies, about the energy transition. They looked at why fossil fuels will continue to play a role in the shift and how technology companies are focusing on renewable sources. They also discuss the firm’s top-down and bottom-up approaches, including its global energy model and quantitative screening criteria, as well as why the portfolio is equal-weighted.
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Speaker 1 (00:14):
Welcome to Inside Active, a podcast about active managers that
goes beyond sound bites and headlines and looks deeper into
the processes, challenges, and philosophies and security selection. I'm David Cohne,
i lead Mutual fund and active Research at Bloomberg Intelligence.
Today my co host is Brian Dharty, head of Thematic
Strategy at Bloomberg Intelligence. Brie, thank you for joining.
Speaker 2 (00:36):
Me today, as always a pleasure, David, thanks for having
me so.
Speaker 1 (00:40):
In bi's theme library, there's a category of physical environment
themes ranging from decentralized energy to nuclear to solar to
transition metals, and some of your recent research has highlighted
that after a rough start to the year, some of
these themes might have found some fresh footing. Talk to
(01:00):
us a little bit more about that.
Speaker 2 (01:02):
Absolutely, energy is always pretty dear to my heart, having
spent a lot of years in the industry, but you're
absolutely right what we've been seeing. So we have thirty
three themes in our BI theme library across three categories,
accelerating Tech, consumerism, and then physical environment. As you said,
twelve in physical environment, pretty broad range of themes. Those
themes are, you know, there's a lot of overarching secular
(01:23):
growth trends associated with those themes. One most prevalent one
naturally being the acceleration and of electrification needs, both here
in the US and actually globally. So those themes, there's
a lot of different type of exposures to that, to
that big strong secular growth trend and decentralized energy nuclear wind, obviously, hydrogen, solar,
(01:43):
there's a whole bunch of themes associated with that. It's
been a complicated year. I think that's probably the best
way to frame this, in the sense that there's actually
been a little bit of a breakout in a subset
of those names. So you might've seen we track our
thirty one multi theme So these are actual equities within
our BI theme library that are mapped more than to
(02:04):
four or more BI themes. The physical environment names in
that list have done really really well in twenty twenty four.
The broad thirty one equities across all three categories have
done extremely well, you know, outpacing the B five hundred
in twenty twenty four by over twenty percent. But actually
the physical environment specific ones, so again those are those
(02:25):
are names who have exposure to four more BI themes,
but with a physical environment biased to them, I guess
would be the best way to describe it. They have
outperformed those accelerating tech names quite dramatically, so I think
they're up forty four percent, or in one age they're
up forty four percent versus something more like nineteen percent
from the accelerating tech names. So it was a really
(02:46):
good year for those multi theme physical environment names. For
the themes themselves, though, it was really hard for a
lot of themes to find their footing. Nuclear did okay,
but ultimately it was a relatively pained one h in
two h As you mentioned, it seems to be a
slightly different story. So actually all of our twelve physical
environment themes are currently outpacing the World Energy Index in
(03:07):
the second half of twenty twenty four, and six of
them I think it was six as of my last count,
are actually help pacing the B five hundred and the
second half of twenty twenty four. So with all that said,
we're excited about how these themes are potentially going to
persist through the end of twenty twenty four and what's
ahead in twenty twenty five.
Speaker 1 (03:24):
Given the fact that.
Speaker 2 (03:24):
We've seen this pretty decent inflection point in the middle
of twenty twenty four.
Speaker 1 (03:28):
Here sounds interesting and be interesting to watch. And speaking
of energy, I'd like to welcome our guest, Jonathan Waghorn,
a portfolio manager at Guinness. He manages the Guinness Global
Energy Strategy in the Guinness Sustainable Energy Strategy. Jonathan, thank
you for joining the podcast.
Speaker 3 (03:47):
That's my pleasure. Thank you very much for having me.
Speaker 1 (03:51):
So to start. You know, we'd really love to hear
about how you got your start in investing.
Speaker 3 (03:57):
Sure, I'm probably a little bit different to many of
the world of investing in that when I finished my
degree in a science background, I decided I wanted to
join the energy industry. I thought it sounded like a
fascinating industry. I was lucky enough to get a job
with Shell International as a drilling engineer, and I did
(04:17):
that for a while before realizing probably that the technical
side of things engineering wasn't for me, so I got
to move across into finance. Ultimately spent a few years
working at Goldman's as a cell side analyst covering European
oil and gas and writing global research, and then lucky
enough to move across to the Byside and since two
(04:40):
thousand and eight. Then I've been a manager of long
only energy funds, so I've gone from a sort of
an energy background into a finance specialism and it's always
been very helpful. I found it very, very useful to
have that sort of knowledge of what really happens in
the industry in which I'm trying to invest.
Speaker 1 (04:58):
And so you're now ed Guinnis and for some of
our US based listeners that might not be familiar with
the firm, can you kind of give us the firm's
investment philosophy.
Speaker 3 (05:09):
Sure, a little bit of history and sorry to disappoint,
we're nothing to do with the beer. We are. The
Guinness Global Investors is the brand name that we have.
We're London based long only value oriented managers. It's a
privately manager owned organization. We have about eleven billion dollars
(05:29):
under management at the minute. We have that in three
key areas. Dominating we have our global equities business. We
then have Energy that I sit within managing the two
energy funds, conventional and sustainable energy, and then we also
have a specialism in Asia as well. We're growing, growing nicely.
I think we're about eighty five people at the current
(05:51):
time and we have a pretty consistent philosophy and approach
to sort of value orientation or growth reasonable value delivering
ourios in a concentrated manner, typically in an equal weighted
philosophy as well, depending upon the volatility of each of
our each of our sectors. And that's againest story. We
were just celebrating our twenty year anniversary.
Speaker 1 (06:12):
Last year, congrats, and you know, we'd like to focus
kind of on the Guinness Sustainable Energy and so you know,
how does Guinness define responsible investing?
Speaker 3 (06:26):
Sure, so I think we lean, you know, somewhat heavily
on the unpri I So the United Nations Principles for
Responsible Investing and the framework that they have, and that
framework is one that incorporates ESG factors when building a
portfolio and then has stewardship activities thereafter. So if we
think about how that plays out in our Sustainable Energy fund,
(06:50):
we integrate and incorporate ESG data from a top down
point of view, understanding the energy transition, the economics, and
the speed of the various different new forms of energy
coming in. We think about bottom up ESG integration, understanding
ESG factors qualitatively by reviewing each of our companies and
doing detailed ESG work. We're compliant with our Norchesbank exclusion list,
(07:14):
and also within the fund we write an impact report.
So there's some of the aspects of incorporating and reporting
on ESG factors in the fund. And then alongside that
there's an engagement program. We do that at a corporate level,
We do that as an investment team, and we have
some collaborative engagement as well, and then we also have
proxy voting that goes alongside that. All of that then
(07:36):
done very much by the investment team, very much as
part of the process that we go through in trying
to understand the risks and the opportunities in ESG make
sure that we capture those in the work that we
do intock the stock selection that we do as well.
Speaker 2 (07:54):
You've raised a couple interesting points there. I'm going to
dig in a little bit on that stock selection. Obviously
relatively concentrated portfolio and the sustainable energy fund that you
guys have, So I'm interested in I understand, looking bottom
up from the ESG perspective, how did you go about
approaching or from the onset of the fund. How did
(08:14):
you think as you look across the broad energy space.
Exactly which aspects of that energy space you were going
to focus on within the fund or does that change
relatively frequently. I'm interested in your kind of more top
down energy perspectives and how that's integrated into the process.
Speaker 3 (08:31):
Sure, it's a very important part. If we think about
sort of the stock selection process as a whole, we've
got top down and we have bottom up, and we
think of it being sort of fifty percent to each.
That's the way it's always been across the energy funds
the last twenty years or so, the top down work.
Then for us as managers of both global energy hydrocarbons
(08:53):
as well as sustainable energy wind, solar, and efficiency, we
need to understand the breadth of the transition. We need
to understand the economics, the policy of each of these
individual forms and how we can build a future around them.
So we build a global energy model that covers at
(09:14):
the top level both of our strategies. We think about
the key drivers of growth, of scarcity, of barriers to entry, economics,
trying to help understand each of these individual areas, and
then that forms really I guess, how we think about
allocating portfolio assets into individual themes. So that informs our
(09:36):
sort of our sub sector allocation, if you would, between
companies involved in displacement, companies involved in the broader electrification theme,
those involved in generating renewable power, and those involved in
installing and creating the equipment to allow all of that
to happen. And that's been a pretty constant process and
(09:57):
thinking over time. That then is complemented by the sort
of the bottom up work and the stock selection and
the evaluation.
Speaker 1 (10:06):
So is there a stock screening process.
Speaker 3 (10:10):
Yes, there is, and that we think of as being
part of the bottom up work. So the approach at
Guinness is to build a universe, and we have a
universe of about two hundred and fifty companies within sustainable energy.
They all have fifty percent of their business activity at
least fifty percent of their business activity in sustainable energy,
and we build a quantitative screen. We screen that two
(10:33):
hundred and fifty companies every month and we score each
of the companies accordingly. We screen on value, We screen
on quality, being high return on capital employed, We look
for positive earnings momentum, and then our fourth sort of
component is positive stock price momentum. We score the companies
and then we go through those on a regular basis
(10:56):
as a team, and that then prioritizes company, prioritizes sub sectors,
areas that we should go off and do some more
sort of deeper due diligence. It doesn't tell us what
to buy, but it's a screen that we can interrogate
to try to understand and give us a very good
overview of what is going on pretty quickly in a
(11:17):
quantitative manner.
Speaker 1 (11:18):
So can you elaborate a little more on the due
diligence process? I mean, do you meet with management teams?
Speaker 3 (11:25):
Yes, so we don't have to meet with management teams.
It's not a requirement, but we do like to consume
data through whatever form we can get that, and that
sometimes will involve communication with management. Think of us as
being a little bit more desk based, I guess in
terms of the way that we work will buy background.
(11:45):
My co manager evaluation specialist, and myself as a self
said analyst, we love doing a little bit of valuation
work and trying to understand sort of the intrinsic value
of the companies that we are that we are buying.
The second half of that due diligence process is to
build some pretty involved company models. We have a standard
(12:07):
template that we use for every company income statement, cash
flow balance sheet, you' the usual criteria. We have a
range of multiples based valuation methodologies are consistent DCF and
where relevant, we have some of the parts work as well.
And ultimately, what we're trying to do here is look
at valuation through various different lenses and if we can
(12:28):
see patterns of value, then that makes us feel comfortable
that we're probably looking at a stop that could play
a part in our portfolio. So we can get good
value from EXCEL sitting at our desks using various different
valuation tools. Where big users of the WHOLT system from
UBS as well. It doesn't require a trip to go
(12:49):
and see a management team, it doesn't require a trip
to go and see a manufacturing facility. We're pretty comfortable
if we can look at the data, we can make
those decisions here without having to be doing the inefficiencies
of long distance trips to go to go and view assets.
Speaker 2 (13:06):
I have to go back to your start in the
energy industry a little bit here, and it's one percent
because I'm biased to somebody who you know. I was
in commodities natural gas, specifically for a lot of years
and was covering the equity side as well. So I'm
somebody who deeply respects people who've had their hands in
the energy industry at some aspect in the career and
the fact that it gives them a really interesting perspective
(13:26):
and understanding of the logistics around energy. So I'm very
interested to hear your perspective, especially having been in the
industry for a while. How has it changed over the years.
What are your perspectives on right now when you look
across these different energy solutions if you will to meet
elect growing electrification needs, what are are you guys thinking
(13:50):
as far as best positioned to be an integral portion
of that ultimate energy solution? So, you know, basically looking
up battery versus versus win versus hydro versus maybe something
that's nuclear, something that's coming around the corner, how are
you guys reconciling that with your process of actually delivering
on the mandate for the fund And.
Speaker 3 (14:13):
Let's think about the role of fossil fuels in all
of that as well.
Speaker 2 (14:16):
Yes, absolutely, I didn't mean to discount that.
Speaker 3 (14:18):
Absolutely, it's a very very broad range. Indeed, if we
think about the transition and the reasons why we believe
this is happening. We think of the world, if I
may say, becoming a bigger place, more people, more demand
for energy, and more diverse forms of energy to satisfy that.
We think about the external threats of climate change impacting
(14:39):
I guess more the developed world, but we think about
air pollution as being more of a pressure in the
developing world. Energy security is increasingly becoming a key key topic,
especially post the Russian invasion of Ukraine, and we for
years said no country wants to rely upon Opek for
it oil or Russia for its natural gas. But key
(15:04):
for us in the work that we do and the
thinking we do is economics is trying to understand where
are the cheapest forms of energy in whatever form coming
into this market, and how will that disrupt and change
things for the future. Now, if we think about how
that has changed, certainly over my career in the energy space,
it's been a dramatic, dramatic change, not so much in
(15:27):
the fossil fuels, but in the renewable space. I don't
have the data going all the way back to sort
of the mid nineteen nineties, but you look at the
cost of generating electricity from solar. Over the last sort
of ten or thirteen years, it's fallen ninety percent offshore
wind onshore wind. Again, dramatic reductions in cost as technology
(15:49):
or scale has allowed these industries to get going, and
that has allowed been solar PB onshore wind as an example,
to be very much at the bottom end of the
cost curve on a leveled basis in terms of generating
new power, and that really is what is driving the transition.
Policy support is there to accelerate it, but otherwise we
(16:10):
think it is very much down, very much down to
the economics and the transition there. And it's not just
those technologies go through the transition. We see it in batteries.
The learning rate for batteries is seventeen percent for lithium
ion batteries. So for every doubling of capacity of manufacturing
capacity of lithium I in batteries, the cost of a
(16:30):
battery has been falling by seventeen percent. And if we
think about where that takes us, hopefully in about three
years time, we'll have batteries at one hundred dollars per
killer what hour as being a pretty kind of regular cost.
That's when I think the electrification of transportation really starts
to take off. And if we think about the technology
(16:50):
roadmap ahead on batteries, it continues solid state batteries, lithium anodes.
We think about the new technology that is in labs
at the minute, we can see dramatic cost reductions from here,
So there's a real journey ahead. By no means have
we come to the end here, and that all points
towards electrification and away from fossil fuels. But then we're
(17:14):
also satisfying growing energy demand, So we need to think
about the fact that fossil fuels will be around for
a fair few more years. Yet coal will be the loser,
but we don't see oil peaking in demand until twenty thirty,
natural gas is probably twenty forty, and even by twenty
fifty there is still good demand for those two fossil
(17:35):
fuels because it takes a long time for this to
work all the way through the system. So this is
a pretty slow moving transition that we're going through here.
It will play out over over decades still.
Speaker 2 (17:48):
So when you look at your fund and specifically and
this is I know you have a more traditional energy
fund as well, right, and yes, sustainable one and the
sustainable one specifically equal weight across all the equities. Do
you have a do you try to provide a certain
weighted exposure to or equal weight exposure to the different
(18:10):
type of technologies. So be it you want only a
portion exposed to solar or the rest you want to batter,
you know, however that might split might be. Is that
relatively stable or do you guys on your rebalances. Are
you consistently looking at how that diversity across the technologies
looks within the fund and versus you know, the actually
underlying equities.
Speaker 3 (18:29):
Sure, if you think of the that top down and
bottom up process that we do, where we're coming up
and selecting stocks which have a good thematic top down
that show good valuation, upside and intrinsic value in terms
of the bottom up work we do. That goes into
a portfolio broadly equal weight. But this is a reasonably
volatile space, so we will allow momentum to play out,
(18:51):
so we don't necessarily rebalance every stock on a regular basis.
We'll let things run a little bit further. The reasons
why we the equal waiting. Incidentally, we think of that
as giving good concentration, so thirty best ideas. Every idea
makes a difference. It does control stock specific risk, so
(19:11):
nothing ever gets too big within the portfolio. We have
a structural cell discipline, so if I want to buy something,
I need to sell something. And then we think that
regular rebalancing, which is an informed rebalancing process, is a
sensible route to creating good returns in the portfolio as well.
We build that portfolio up, we look at the waitings,
(19:34):
be those geographic, be those by sector, and we look
at that relative to our universe. We think about the
relative overweights and underweights that we have, and then ultimately
we'll allow those positions to sort of trend over time
depending on where we feel things are more advantaged or
not at different points. It's low turnover, so typically this
(19:56):
is sort of ten to fifteen maybe twenty percent turnover
a year.
Speaker 2 (19:59):
Is there anything that's prized you? And I mean I
can think to myself as too, if you were to
ask me twenty years ago which ones of these technologies
maybe would be at the forefront right now, I don't
know necessarily that I'd be giving the same answer twenty
years ago as i'd be saying right now. So I'm
curious from your perspective, is there anything that surprised you
in how this transition has thus far manifested and kind
(20:21):
of where we're at right now with respect to these
different types of technologies. Again, you know, we solar hydrogen
win batteries. Do you think that we were you expecting
us to be further ahead in some aspects or are
we further ahead than you thought we would be?
Speaker 3 (20:36):
Yeah, I'd probably could say we're further ahead than where
I would have thought we would be. If you think
of the investment going into clean energy just recently, I
mean last year was one point seven trillion dollars into
clean energy. That was a level that was up three
times relative to the expenditure in twenty nineteen. Okay, so
there is a clear effort and push towards this in a,
(21:00):
you know, in a very very significant manner. So in
that respect, there's a lot that's being done. If we're
going to believe a net zero scenario, that investment needs
to be four or five trillion dollars per annum. So
there's still, you know, an awful long way to go.
When I kind of I sit back and I think
about how things are evolving, I think nuclear is an
(21:20):
area that really satisfies many of the demands that we
have in terms of clean, carbon free baseload power, and
it's somewhat surprising that that is still as small as
it is and that the industry has not got better
at developing nuclear Clearly very topical at the current time
if you think of the Microsoft's and the Googles and
(21:41):
the Amazons signing up to get nuclear in the US
because of artificial intelligence. So that's surprising that that hasn't progressed.
And then I'd say I find the hydrogen industry slightly confusing.
A lot of excitement and enthusiasm the last five years
about the great hope of hydrogen, and I still think
that is an industry that is still very, very economically stretched,
(22:07):
just in the cost of generating green hydrogen, the cost
of doing that, the energy loss that goes through doing that,
the cost of storing hydrogen is really quite significant. So
I've still yet to be convinced with with the likes
of hydrogen. So I find that a bit of a
bit of a surprise relative to what I would have expected.
Speaker 1 (22:26):
I wanted to follow up. You mentioned you have a
structured cell process. Is it you know, better opportunities or
valuations that would you know, make you you know, sell
a stock.
Speaker 3 (22:39):
Yeah, I guess the investment process we go through, we
come up with an intrinsic value, you know, what do
we think this company is really worth on a sort
of a through cycle normalized valuation methodology. So seeing that
share price being or that value being breached would indicate
that we might be looking to get out of a position.
(22:59):
It would have to you know, materially breach the intrinsic
value I think for us to be doing that. Ultimately,
I talked about the switch process. So you know, we
are thirty positions, so we would be selling something if
we find a better buy idea. So there's a relative
sort of component to that as well. And if you
(23:19):
look at the cells that we've had, I think over
the last five years, you'll see that some of that
is why fair proportion is M and A activity, so
companies being bid for. So again, if you think about
the value bias that we have in the work that
we do, that's quite often replicated in industrial activity, so
in mergers and acquisitions. So we found that again a
number of our positions have have been acquired as well.
Speaker 2 (23:42):
It's a crowded space, right, there's plenty of people that
there's plenty of funds that are trying to look at
energy transition and that have been built around the concept
that there's obviously huge, overarching and secular growth trend there.
What really different is your fund? And we talked about
a few things here. Naturally, it's a concentrated exposure. You
have a very robust bottom up and top down mix.
But interested to hear from you, I'm sure that you
(24:03):
look at the competition fairly frequently and how how does
yours differ relatives from the other funds out there? And
where do you think your edge is as you look
to where you think the actual energy industry has had it.
Speaker 3 (24:16):
Sure, we never say a bad word about our competition.
They're all great, naturally, nor should you.
Speaker 2 (24:22):
Everybody has a right to be there.
Speaker 3 (24:25):
So I'll get on my sales soapbox just for just
for a moment.
Speaker 1 (24:29):
It was a very cool there. I appreciate it.
Speaker 3 (24:32):
What's what's going to differentiate the fund ultimately is going
to be the performance, isn't it? So we were everything
we do we're trying to sort of optimize the performance.
This is a crowded space. But then we can point
to the fact that we got into this area back
in two thousand and seven, so we've been around for
a few years. Actually, our experience in energy is about
(24:52):
twenty five years now, and it's the same team that
covers both sides of energy, which I think is a
real advantage the universe that I mentioned earlier, and I
think the screening of that, the understanding of that that's
bespoke to us. I think that's a very good starting
point from the point of view of coming up with ideas.
Having a value orientation to the work that we do.
I think again makes good sense of trying to get
(25:14):
growth at reasonable value. That is a sensible approach in
this area. And then I think the impact alignment work
that we do. There's an impact report on the fund.
I think that again also helps to differentiate what we do,
and that's kind of a support for our investors as well,
and for those who want to turn to it. The
(25:34):
Guinness website Guinness Global Investors, you'll see lots of written content,
monthly reports, webcasts, annual outlooks. We'd like to think that
we provide a good service around that to help investors
understand what is going on in this space at the
current time.
Speaker 2 (25:51):
And I mean you've mentioned that this fund's been around
two thousand and seven. Again, we're tired about the fact
that you've been looking at this space from many different
goals over many years. You said a few minutes ago
two things to me, there are two of my favorite
things to talk about recently, it seems. One is M
(26:11):
and A in the energy space, it's always going to
be interesting. I think we're at a really interesting time
right now. And then the other is I'm quite keen
to see how this plays out, that this new found
hyper focus of technology companies, so big tech companies dollars
really focusing on resilient, reliable, more sustainable energy to support
(26:37):
their long term business strategies. That as a potential real catalyst.
What are your thoughts on how impactful you think that
tech obsession might be not the right word, but tech
focus is on energy right now, and the historically it's
always been so heavily reliant on policy. How impactful you
(26:59):
think could be over the next few years, And then
you know, anytime you want to sprinkle anything around M
and A and how you're viewing that current landscape right now,
and the implications always came to hear that as well.
Speaker 3 (27:13):
It is very interesting, I think this year the outlook
for electricity demand growth, especially in the US around data
centers and big tech. It has really transformed. US power
demand the last ten years has grown at sort of
a percentage point for ADAM and we're seeing forecast now
of power demand growing at two and a half percent
(27:33):
per annum over the next ten years. So that means
that data centers will go from two and a half
percent of US power demand to seven and a half
percent of US power demand just in about three years
from now. Don't underestimate the size of these things. A
data center has a grid connection the size of an airport,
and you know, we are building these things rapidly. The
(27:53):
number of data centers being built now, I think is
up seven times on what we saw just just two
years ago. So this is one component, and it does
appear to be pretty strong, pretty robust. It's not just
a case of getting electricity to these facilities though, it
is also a case of having the grid in a
position to allow that to happen. And we think of
(28:16):
much of the Western world's power grid being forty to
fifty years old, So we need to see investment in
the global power grid, you know, doubling by twenty thirty.
And that's to allow for expansion, reconnection, digitalization, you know,
and we need to see that investment being supported with
policy with rates of return, and ultimately, you know, all
(28:39):
of this kind of feeds together towards greater electricity demand.
It won't purely be solved by wind, it won't purely
be solved by solar. Nuclear won't do much because it
takes ten years to build a nuclear facility and it
will be the mid twenty thirties before we have any
hope of small modular reactors helping here. So it also
plays out to natural gas. You know, natural gas will
(28:59):
be clearly a route that will be successful here in
growing electricity demand. On the point of M and A
as well. Actually, again that's been quite interesting this summer.
The greater electricity demand means that a number of the
independent power producers have been bid for, and we're seeing
private equity essentially doing that, four or five deals being
announced over the summer. We also saw equinor the older
(29:23):
stat Oil, taking a ten percent stake in AUSTED So
that's the Danish wind power producer. And we saw Rio
Tinto bidding over one hundred percent to the undisturbed price
to acquire arcadium lithium, so the pure play lithium minor
and producer. So we are stilling to see some M
and A and again that's that's pretty good for us.
(29:45):
We like to see that kind of activity.
Speaker 2 (29:48):
I really I think that those are great things to
call it on that M and A side. I hurting
back to I'm going to get the dates wrong, but
when you think of the big disruption and related to
large cap independence with here here within the US, around
the rise of shale both gas and oil, and just
how that spurred such a robust M and A market
(30:10):
in the energy field for a good sub section of years,
I think it'll be interesting to see if in this
more renewables or new energy landscape, if we're kind of
due for the next stage of M and A or
you know, be it asset swaps or MNA activity, how
that manifests we mentioned you mentioned there in the list
(30:32):
there are quite a few large caps or ultra large
caps majors. How do we think that sort of big
company versus maybe small caps newer entrants do we think
that there's space for these smaller companies to hold their
own and continue to you know, move through this, or
do we really think that this is a space that's
going to be predominantly dominated by the bigger players size
(30:56):
the benefit here or is there space for smaller companies
to be in the next.
Speaker 3 (31:01):
Yeah, I think I'd probably go with trend and say, yeah,
this is going to be big companies mopping up. Yeah,
we see that in the conventional space. That's just been
the history of things. We see that also somewhat here
in the sustainable energy space, but I think we're still
waiting to really see sort of the higher levels of
M and A activity in this area as far as
(31:22):
as far as I can see. That requires somewhat the
likes of the global super majors in oil and gas
to work out exactly what their strategies are, exactly how
they can evolve in the energy transition. The areas that
they're looking at. Is it carbon catch and storage, is
it hydrogen, is it renewable fuels. We're seeing you know,
a fair amount of deals going on there. So yes,
(31:44):
I'd say this is all still very very much in process,
and we again we've tried very very hard, and we
can't always do this all the time, but just to
try to work out what is the intrinsic value of
this thing, not how exciting is the story, but how
how valuable is the asset, how valuable are the cash flows,
and either the stock market will reflect that or there'll
(32:04):
be some M and A activity. It's going to be
one of those two over time. Sometimes it's nice to
see the m and A. And sometimes it's a real
shame when you own a good company that's doing well
that is taken out by a big competitor, and you
know ultimately there've yeah, there's been some value that's been
taken away.
Speaker 2 (32:20):
You mentioned a little bit earlier that you're you're not
quick to move in and out of the underlining equities
just in any rebalance, just because, but you know, rather
seeing it through potentially some of the volatility. When you
think of over the entire lifespan of the fund thus far,
has there been a lot of evolution of those underlining
equities or have there been some mainstays in there?
Speaker 3 (32:40):
Yeah? Sure, so we've had a fair amount of mainstays.
I guess over time, I'm probably plucking numbers out of
the air here a bit, but I would think relative
to five years ago, forty or fifty percent of the
portfolio will will be the same holdings, the same names
in that we've added and we've lost some names through
through sales through M and A. If I go back
(33:01):
over the last five years, I'd say we've increased our
exposure to the States, We've reduced our exposure to the
emerging markets, reduced our exposure to China. Within that, our
European exposure has been broadly flat over that time period.
And then within the sub sectors we've added more in efficiency.
(33:23):
Some of our recent additions have been in areas like
insulation in the United States, manufacturing and installing insulation. We've
slightly reduced our exposure to battery and electric vehicles. We've
reduced our exposure to generation companies, so to the power producers,
and our exposure to equipment has been broadly the same
(33:44):
equipment manufacturers over time. And actually again given some good
performance over that five year period, not not so much
the last eighteen months, but over five years, the market
cap on average has been blending upwards in the portfolio
as well. I think our median mark cap today is
around the seventeen billion dollar level.
Speaker 1 (34:04):
I actually had a kind of a somewhat of a
follow up, you know, in your view, how has responsible
energy investing changed over the past five or ten years?
Speaker 3 (34:15):
Yeah, quite I guess quite a lot. I'm going to
show my age here a little bit. I'm going to
go back a little bit further than that, I think,
you know, I go back to the where would it
have been about two thousand and four, two thousand and
five Goldman's I was part of the sell side research
(34:36):
team covering European oily gas companies, but also writing the
kind of the global research for Goldmans as well. And
I remember the day quite clearly when my boss opposite
and me opened a letter, yep, a letter that he
had received. It was those days, and it was from
the UN. It's from the United Nations. It was a
letter from KOFE NAM to our team asking if we
(34:56):
would write a piece of research about ESG fact us
in the global oil and gas industry. And that was
a completely new thing. That was a completely new what
is ESG? What is the data? We spent probably three
or four months putting together an index, finding data and
doing analysis. So things have really changed an awful lot
(35:17):
in the last twenty years, so the amount of data
that is available, the integration of that data, it has
changed dramatically. So that's the kind of the point of
ESG and responsible investing. I'm sure there will be more
progressed from here as well. And then at the same time,
we've seen the industry evolve in terms of growth of renewables,
the importance of energy efficiency. But even then, still today
(35:40):
we're eighty three percent satisfying world energy demand by fossil fuels,
so this has still got I think a very very
long way to go.
Speaker 1 (35:47):
That'd be great to watch. Thank you again for joining us, Jonathan.
Speaker 3 (35:50):
That's my pleasure. Thank you very much for having me
on BRI.
Speaker 1 (35:54):
Thank you for being my co host today.
Speaker 2 (35:56):
It's always a pleasure, David. I appreciate every invite and
thank thank you very much this time, especially so Jonathan,
because we got to talk energy and I don't always
get to talk that on my day to day so
it's always a pleasure to do that.
Speaker 1 (36:08):
Until our next episode, This is David Combe with Inside
Active
Welcome to Inside Active, a podcast about active managers that
goes beyond sound bites and headlines and looks deeper into
the processes, challenges, and philosophies and security selection. I'm David Cohne,
i lead Mutual fund and active Research at Bloomberg Intelligence.
Today my co host is Brian Dharty, head of Thematic
Strategy at Bloomberg Intelligence. Brie, thank you for joining.
Speaker 2 (00:36):
Me today, as always a pleasure, David, thanks for having
me so.
Speaker 1 (00:40):
In bi's theme library, there's a category of physical environment
themes ranging from decentralized energy to nuclear to solar to
transition metals, and some of your recent research has highlighted
that after a rough start to the year, some of
these themes might have found some fresh footing. Talk to
(01:00):
us a little bit more about that.
Speaker 2 (01:02):
Absolutely, energy is always pretty dear to my heart, having
spent a lot of years in the industry, but you're
absolutely right what we've been seeing. So we have thirty
three themes in our BI theme library across three categories,
accelerating Tech, consumerism, and then physical environment. As you said,
twelve in physical environment, pretty broad range of themes. Those
themes are, you know, there's a lot of overarching secular
(01:23):
growth trends associated with those themes. One most prevalent one
naturally being the acceleration and of electrification needs, both here
in the US and actually globally. So those themes, there's
a lot of different type of exposures to that, to
that big strong secular growth trend and decentralized energy nuclear wind, obviously, hydrogen, solar,
(01:43):
there's a whole bunch of themes associated with that. It's
been a complicated year. I think that's probably the best
way to frame this, in the sense that there's actually
been a little bit of a breakout in a subset
of those names. So you might've seen we track our
thirty one multi theme So these are actual equities within
our BI theme library that are mapped more than to
(02:04):
four or more BI themes. The physical environment names in
that list have done really really well in twenty twenty four.
The broad thirty one equities across all three categories have
done extremely well, you know, outpacing the B five hundred
in twenty twenty four by over twenty percent. But actually
the physical environment specific ones, so again those are those
(02:25):
are names who have exposure to four more BI themes,
but with a physical environment biased to them, I guess
would be the best way to describe it. They have
outperformed those accelerating tech names quite dramatically, so I think
they're up forty four percent, or in one age they're
up forty four percent versus something more like nineteen percent
from the accelerating tech names. So it was a really
(02:46):
good year for those multi theme physical environment names. For
the themes themselves, though, it was really hard for a
lot of themes to find their footing. Nuclear did okay,
but ultimately it was a relatively pained one h in
two h As you mentioned, it seems to be a
slightly different story. So actually all of our twelve physical
environment themes are currently outpacing the World Energy Index in
(03:07):
the second half of twenty twenty four, and six of
them I think it was six as of my last count,
are actually help pacing the B five hundred and the
second half of twenty twenty four. So with all that said,
we're excited about how these themes are potentially going to
persist through the end of twenty twenty four and what's
ahead in twenty twenty five.
Speaker 1 (03:24):
Given the fact that.
Speaker 2 (03:24):
We've seen this pretty decent inflection point in the middle
of twenty twenty four.
Speaker 1 (03:28):
Here sounds interesting and be interesting to watch. And speaking
of energy, I'd like to welcome our guest, Jonathan Waghorn,
a portfolio manager at Guinness. He manages the Guinness Global
Energy Strategy in the Guinness Sustainable Energy Strategy. Jonathan, thank
you for joining the podcast.
Speaker 3 (03:47):
That's my pleasure. Thank you very much for having me.
Speaker 1 (03:51):
So to start. You know, we'd really love to hear
about how you got your start in investing.
Speaker 3 (03:57):
Sure, I'm probably a little bit different to many of
the world of investing in that when I finished my
degree in a science background, I decided I wanted to
join the energy industry. I thought it sounded like a
fascinating industry. I was lucky enough to get a job
with Shell International as a drilling engineer, and I did
(04:17):
that for a while before realizing probably that the technical
side of things engineering wasn't for me, so I got
to move across into finance. Ultimately spent a few years
working at Goldman's as a cell side analyst covering European
oil and gas and writing global research, and then lucky
enough to move across to the Byside and since two
(04:40):
thousand and eight. Then I've been a manager of long
only energy funds, so I've gone from a sort of
an energy background into a finance specialism and it's always
been very helpful. I found it very, very useful to
have that sort of knowledge of what really happens in
the industry in which I'm trying to invest.
Speaker 1 (04:58):
And so you're now ed Guinnis and for some of
our US based listeners that might not be familiar with
the firm, can you kind of give us the firm's
investment philosophy.
Speaker 3 (05:09):
Sure, a little bit of history and sorry to disappoint,
we're nothing to do with the beer. We are. The
Guinness Global Investors is the brand name that we have.
We're London based long only value oriented managers. It's a
privately manager owned organization. We have about eleven billion dollars
(05:29):
under management at the minute. We have that in three
key areas. Dominating we have our global equities business. We
then have Energy that I sit within managing the two
energy funds, conventional and sustainable energy, and then we also
have a specialism in Asia as well. We're growing, growing nicely.
I think we're about eighty five people at the current
(05:51):
time and we have a pretty consistent philosophy and approach
to sort of value orientation or growth reasonable value delivering
ourios in a concentrated manner, typically in an equal weighted
philosophy as well, depending upon the volatility of each of
our each of our sectors. And that's againest story. We
were just celebrating our twenty year anniversary.
Speaker 1 (06:12):
Last year, congrats, and you know, we'd like to focus
kind of on the Guinness Sustainable Energy and so you know,
how does Guinness define responsible investing?
Speaker 3 (06:26):
Sure, so I think we lean, you know, somewhat heavily
on the unpri I So the United Nations Principles for
Responsible Investing and the framework that they have, and that
framework is one that incorporates ESG factors when building a
portfolio and then has stewardship activities thereafter. So if we
think about how that plays out in our Sustainable Energy fund,
(06:50):
we integrate and incorporate ESG data from a top down
point of view, understanding the energy transition, the economics, and
the speed of the various different new forms of energy
coming in. We think about bottom up ESG integration, understanding
ESG factors qualitatively by reviewing each of our companies and
doing detailed ESG work. We're compliant with our Norchesbank exclusion list,
(07:14):
and also within the fund we write an impact report.
So there's some of the aspects of incorporating and reporting
on ESG factors in the fund. And then alongside that
there's an engagement program. We do that at a corporate level,
We do that as an investment team, and we have
some collaborative engagement as well, and then we also have
proxy voting that goes alongside that. All of that then
(07:36):
done very much by the investment team, very much as
part of the process that we go through in trying
to understand the risks and the opportunities in ESG make
sure that we capture those in the work that we
do intock the stock selection that we do as well.
Speaker 2 (07:54):
You've raised a couple interesting points there. I'm going to
dig in a little bit on that stock selection. Obviously
relatively concentrated portfolio and the sustainable energy fund that you
guys have, So I'm interested in I understand, looking bottom
up from the ESG perspective, how did you go about
approaching or from the onset of the fund. How did
(08:14):
you think as you look across the broad energy space.
Exactly which aspects of that energy space you were going
to focus on within the fund or does that change
relatively frequently. I'm interested in your kind of more top
down energy perspectives and how that's integrated into the process.
Speaker 3 (08:31):
Sure, it's a very important part. If we think about
sort of the stock selection process as a whole, we've
got top down and we have bottom up, and we
think of it being sort of fifty percent to each.
That's the way it's always been across the energy funds
the last twenty years or so, the top down work.
Then for us as managers of both global energy hydrocarbons
(08:53):
as well as sustainable energy wind, solar, and efficiency, we
need to understand the breadth of the transition. We need
to understand the economics, the policy of each of these
individual forms and how we can build a future around them.
So we build a global energy model that covers at
(09:14):
the top level both of our strategies. We think about
the key drivers of growth, of scarcity, of barriers to entry, economics,
trying to help understand each of these individual areas, and
then that forms really I guess, how we think about
allocating portfolio assets into individual themes. So that informs our
(09:36):
sort of our sub sector allocation, if you would, between
companies involved in displacement, companies involved in the broader electrification theme,
those involved in generating renewable power, and those involved in
installing and creating the equipment to allow all of that
to happen. And that's been a pretty constant process and
(09:57):
thinking over time. That then is complemented by the sort
of the bottom up work and the stock selection and
the evaluation.
Speaker 1 (10:06):
So is there a stock screening process.
Speaker 3 (10:10):
Yes, there is, and that we think of as being
part of the bottom up work. So the approach at
Guinness is to build a universe, and we have a
universe of about two hundred and fifty companies within sustainable energy.
They all have fifty percent of their business activity at
least fifty percent of their business activity in sustainable energy,
and we build a quantitative screen. We screen that two
(10:33):
hundred and fifty companies every month and we score each
of the companies accordingly. We screen on value, We screen
on quality, being high return on capital employed, We look
for positive earnings momentum, and then our fourth sort of
component is positive stock price momentum. We score the companies
and then we go through those on a regular basis
(10:56):
as a team, and that then prioritizes company, prioritizes sub sectors,
areas that we should go off and do some more
sort of deeper due diligence. It doesn't tell us what
to buy, but it's a screen that we can interrogate
to try to understand and give us a very good
overview of what is going on pretty quickly in a
(11:17):
quantitative manner.
Speaker 1 (11:18):
So can you elaborate a little more on the due
diligence process? I mean, do you meet with management teams?
Speaker 3 (11:25):
Yes, so we don't have to meet with management teams.
It's not a requirement, but we do like to consume
data through whatever form we can get that, and that
sometimes will involve communication with management. Think of us as
being a little bit more desk based, I guess in
terms of the way that we work will buy background.
(11:45):
My co manager evaluation specialist, and myself as a self
said analyst, we love doing a little bit of valuation
work and trying to understand sort of the intrinsic value
of the companies that we are that we are buying.
The second half of that due diligence process is to
build some pretty involved company models. We have a standard
(12:07):
template that we use for every company income statement, cash
flow balance sheet, you' the usual criteria. We have a
range of multiples based valuation methodologies are consistent DCF and
where relevant, we have some of the parts work as well.
And ultimately, what we're trying to do here is look
at valuation through various different lenses and if we can
(12:28):
see patterns of value, then that makes us feel comfortable
that we're probably looking at a stop that could play
a part in our portfolio. So we can get good
value from EXCEL sitting at our desks using various different
valuation tools. Where big users of the WHOLT system from
UBS as well. It doesn't require a trip to go
(12:49):
and see a management team, it doesn't require a trip
to go and see a manufacturing facility. We're pretty comfortable
if we can look at the data, we can make
those decisions here without having to be doing the inefficiencies
of long distance trips to go to go and view assets.
Speaker 2 (13:06):
I have to go back to your start in the
energy industry a little bit here, and it's one percent
because I'm biased to somebody who you know. I was
in commodities natural gas, specifically for a lot of years
and was covering the equity side as well. So I'm
somebody who deeply respects people who've had their hands in
the energy industry at some aspect in the career and
the fact that it gives them a really interesting perspective
(13:26):
and understanding of the logistics around energy. So I'm very
interested to hear your perspective, especially having been in the
industry for a while. How has it changed over the years.
What are your perspectives on right now when you look
across these different energy solutions if you will to meet
elect growing electrification needs, what are are you guys thinking
(13:50):
as far as best positioned to be an integral portion
of that ultimate energy solution? So, you know, basically looking
up battery versus versus win versus hydro versus maybe something
that's nuclear, something that's coming around the corner, how are
you guys reconciling that with your process of actually delivering
on the mandate for the fund And.
Speaker 3 (14:13):
Let's think about the role of fossil fuels in all
of that as well.
Speaker 2 (14:16):
Yes, absolutely, I didn't mean to discount that.
Speaker 3 (14:18):
Absolutely, it's a very very broad range. Indeed, if we
think about the transition and the reasons why we believe
this is happening. We think of the world, if I
may say, becoming a bigger place, more people, more demand
for energy, and more diverse forms of energy to satisfy that.
We think about the external threats of climate change impacting
(14:39):
I guess more the developed world, but we think about
air pollution as being more of a pressure in the
developing world. Energy security is increasingly becoming a key key topic,
especially post the Russian invasion of Ukraine, and we for
years said no country wants to rely upon Opek for
it oil or Russia for its natural gas. But key
(15:04):
for us in the work that we do and the
thinking we do is economics is trying to understand where
are the cheapest forms of energy in whatever form coming
into this market, and how will that disrupt and change
things for the future. Now, if we think about how
that has changed, certainly over my career in the energy space,
it's been a dramatic, dramatic change, not so much in
(15:27):
the fossil fuels, but in the renewable space. I don't
have the data going all the way back to sort
of the mid nineteen nineties, but you look at the
cost of generating electricity from solar. Over the last sort
of ten or thirteen years, it's fallen ninety percent offshore
wind onshore wind. Again, dramatic reductions in cost as technology
(15:49):
or scale has allowed these industries to get going, and
that has allowed been solar PB onshore wind as an example,
to be very much at the bottom end of the
cost curve on a leveled basis in terms of generating
new power, and that really is what is driving the transition.
Policy support is there to accelerate it, but otherwise we
(16:10):
think it is very much down, very much down to
the economics and the transition there. And it's not just
those technologies go through the transition. We see it in batteries.
The learning rate for batteries is seventeen percent for lithium
ion batteries. So for every doubling of capacity of manufacturing
capacity of lithium I in batteries, the cost of a
(16:30):
battery has been falling by seventeen percent. And if we
think about where that takes us, hopefully in about three
years time, we'll have batteries at one hundred dollars per
killer what hour as being a pretty kind of regular cost.
That's when I think the electrification of transportation really starts
to take off. And if we think about the technology
(16:50):
roadmap ahead on batteries, it continues solid state batteries, lithium anodes.
We think about the new technology that is in labs
at the minute, we can see dramatic cost reductions from here,
So there's a real journey ahead. By no means have
we come to the end here, and that all points
towards electrification and away from fossil fuels. But then we're
(17:14):
also satisfying growing energy demand, So we need to think
about the fact that fossil fuels will be around for
a fair few more years. Yet coal will be the loser,
but we don't see oil peaking in demand until twenty thirty,
natural gas is probably twenty forty, and even by twenty
fifty there is still good demand for those two fossil
(17:35):
fuels because it takes a long time for this to
work all the way through the system. So this is
a pretty slow moving transition that we're going through here.
It will play out over over decades still.
Speaker 2 (17:48):
So when you look at your fund and specifically and
this is I know you have a more traditional energy
fund as well, right, and yes, sustainable one and the
sustainable one specifically equal weight across all the equities. Do
you have a do you try to provide a certain
weighted exposure to or equal weight exposure to the different
(18:10):
type of technologies. So be it you want only a
portion exposed to solar or the rest you want to batter,
you know, however that might split might be. Is that
relatively stable or do you guys on your rebalances. Are
you consistently looking at how that diversity across the technologies
looks within the fund and versus you know, the actually
underlying equities.
Speaker 3 (18:29):
Sure, if you think of the that top down and
bottom up process that we do, where we're coming up
and selecting stocks which have a good thematic top down
that show good valuation, upside and intrinsic value in terms
of the bottom up work we do. That goes into
a portfolio broadly equal weight. But this is a reasonably
volatile space, so we will allow momentum to play out,
(18:51):
so we don't necessarily rebalance every stock on a regular basis.
We'll let things run a little bit further. The reasons
why we the equal waiting. Incidentally, we think of that
as giving good concentration, so thirty best ideas. Every idea
makes a difference. It does control stock specific risk, so
(19:11):
nothing ever gets too big within the portfolio. We have
a structural cell discipline, so if I want to buy something,
I need to sell something. And then we think that
regular rebalancing, which is an informed rebalancing process, is a
sensible route to creating good returns in the portfolio as well.
We build that portfolio up, we look at the waitings,
(19:34):
be those geographic, be those by sector, and we look
at that relative to our universe. We think about the
relative overweights and underweights that we have, and then ultimately
we'll allow those positions to sort of trend over time
depending on where we feel things are more advantaged or
not at different points. It's low turnover, so typically this
(19:56):
is sort of ten to fifteen maybe twenty percent turnover
a year.
Speaker 2 (19:59):
Is there anything that's prized you? And I mean I
can think to myself as too, if you were to
ask me twenty years ago which ones of these technologies
maybe would be at the forefront right now, I don't
know necessarily that I'd be giving the same answer twenty
years ago as i'd be saying right now. So I'm
curious from your perspective, is there anything that surprised you
in how this transition has thus far manifested and kind
(20:21):
of where we're at right now with respect to these
different types of technologies. Again, you know, we solar hydrogen
win batteries. Do you think that we were you expecting
us to be further ahead in some aspects or are
we further ahead than you thought we would be?
Speaker 3 (20:36):
Yeah, I'd probably could say we're further ahead than where
I would have thought we would be. If you think
of the investment going into clean energy just recently, I
mean last year was one point seven trillion dollars into
clean energy. That was a level that was up three
times relative to the expenditure in twenty nineteen. Okay, so
there is a clear effort and push towards this in a,
(21:00):
you know, in a very very significant manner. So in
that respect, there's a lot that's being done. If we're
going to believe a net zero scenario, that investment needs
to be four or five trillion dollars per annum. So
there's still, you know, an awful long way to go.
When I kind of I sit back and I think
about how things are evolving, I think nuclear is an
(21:20):
area that really satisfies many of the demands that we
have in terms of clean, carbon free baseload power, and
it's somewhat surprising that that is still as small as
it is and that the industry has not got better
at developing nuclear Clearly very topical at the current time
if you think of the Microsoft's and the Googles and
(21:41):
the Amazons signing up to get nuclear in the US
because of artificial intelligence. So that's surprising that that hasn't progressed.
And then I'd say I find the hydrogen industry slightly confusing.
A lot of excitement and enthusiasm the last five years
about the great hope of hydrogen, and I still think
that is an industry that is still very, very economically stretched,
(22:07):
just in the cost of generating green hydrogen, the cost
of doing that, the energy loss that goes through doing that,
the cost of storing hydrogen is really quite significant. So
I've still yet to be convinced with with the likes
of hydrogen. So I find that a bit of a
bit of a surprise relative to what I would have expected.
Speaker 1 (22:26):
I wanted to follow up. You mentioned you have a
structured cell process. Is it you know, better opportunities or
valuations that would you know, make you you know, sell
a stock.
Speaker 3 (22:39):
Yeah, I guess the investment process we go through, we
come up with an intrinsic value, you know, what do
we think this company is really worth on a sort
of a through cycle normalized valuation methodology. So seeing that
share price being or that value being breached would indicate
that we might be looking to get out of a position.
(22:59):
It would have to you know, materially breach the intrinsic
value I think for us to be doing that. Ultimately,
I talked about the switch process. So you know, we
are thirty positions, so we would be selling something if
we find a better buy idea. So there's a relative
sort of component to that as well. And if you
(23:19):
look at the cells that we've had, I think over
the last five years, you'll see that some of that
is why fair proportion is M and A activity, so
companies being bid for. So again, if you think about
the value bias that we have in the work that
we do, that's quite often replicated in industrial activity, so
in mergers and acquisitions. So we found that again a
number of our positions have have been acquired as well.
Speaker 2 (23:42):
It's a crowded space, right, there's plenty of people that
there's plenty of funds that are trying to look at
energy transition and that have been built around the concept
that there's obviously huge, overarching and secular growth trend there.
What really different is your fund? And we talked about
a few things here. Naturally, it's a concentrated exposure. You
have a very robust bottom up and top down mix.
But interested to hear from you, I'm sure that you
(24:03):
look at the competition fairly frequently and how how does
yours differ relatives from the other funds out there? And
where do you think your edge is as you look
to where you think the actual energy industry has had it.
Speaker 3 (24:16):
Sure, we never say a bad word about our competition.
They're all great, naturally, nor should you.
Speaker 2 (24:22):
Everybody has a right to be there.
Speaker 3 (24:25):
So I'll get on my sales soapbox just for just
for a moment.
Speaker 1 (24:29):
It was a very cool there. I appreciate it.
Speaker 3 (24:32):
What's what's going to differentiate the fund ultimately is going
to be the performance, isn't it? So we were everything
we do we're trying to sort of optimize the performance.
This is a crowded space. But then we can point
to the fact that we got into this area back
in two thousand and seven, so we've been around for
a few years. Actually, our experience in energy is about
(24:52):
twenty five years now, and it's the same team that
covers both sides of energy, which I think is a
real advantage the universe that I mentioned earlier, and I
think the screening of that, the understanding of that that's
bespoke to us. I think that's a very good starting
point from the point of view of coming up with ideas.
Having a value orientation to the work that we do.
I think again makes good sense of trying to get
(25:14):
growth at reasonable value. That is a sensible approach in
this area. And then I think the impact alignment work
that we do. There's an impact report on the fund.
I think that again also helps to differentiate what we do,
and that's kind of a support for our investors as well,
and for those who want to turn to it. The
(25:34):
Guinness website Guinness Global Investors, you'll see lots of written content,
monthly reports, webcasts, annual outlooks. We'd like to think that
we provide a good service around that to help investors
understand what is going on in this space at the
current time.
Speaker 2 (25:51):
And I mean you've mentioned that this fund's been around
two thousand and seven. Again, we're tired about the fact
that you've been looking at this space from many different
goals over many years. You said a few minutes ago
two things to me, there are two of my favorite
things to talk about recently, it seems. One is M
(26:11):
and A in the energy space, it's always going to
be interesting. I think we're at a really interesting time
right now. And then the other is I'm quite keen
to see how this plays out, that this new found
hyper focus of technology companies, so big tech companies dollars
really focusing on resilient, reliable, more sustainable energy to support
(26:37):
their long term business strategies. That as a potential real catalyst.
What are your thoughts on how impactful you think that
tech obsession might be not the right word, but tech
focus is on energy right now, and the historically it's
always been so heavily reliant on policy. How impactful you
(26:59):
think could be over the next few years, And then
you know, anytime you want to sprinkle anything around M
and A and how you're viewing that current landscape right now,
and the implications always came to hear that as well.
Speaker 3 (27:13):
It is very interesting, I think this year the outlook
for electricity demand growth, especially in the US around data
centers and big tech. It has really transformed. US power
demand the last ten years has grown at sort of
a percentage point for ADAM and we're seeing forecast now
of power demand growing at two and a half percent
(27:33):
per annum over the next ten years. So that means
that data centers will go from two and a half
percent of US power demand to seven and a half
percent of US power demand just in about three years
from now. Don't underestimate the size of these things. A
data center has a grid connection the size of an airport,
and you know, we are building these things rapidly. The
(27:53):
number of data centers being built now, I think is
up seven times on what we saw just just two
years ago. So this is one component, and it does
appear to be pretty strong, pretty robust. It's not just
a case of getting electricity to these facilities though, it
is also a case of having the grid in a
position to allow that to happen. And we think of
(28:16):
much of the Western world's power grid being forty to
fifty years old, So we need to see investment in
the global power grid, you know, doubling by twenty thirty.
And that's to allow for expansion, reconnection, digitalization, you know,
and we need to see that investment being supported with
policy with rates of return, and ultimately, you know, all
(28:39):
of this kind of feeds together towards greater electricity demand.
It won't purely be solved by wind, it won't purely
be solved by solar. Nuclear won't do much because it
takes ten years to build a nuclear facility and it
will be the mid twenty thirties before we have any
hope of small modular reactors helping here. So it also
plays out to natural gas. You know, natural gas will
(28:59):
be clearly a route that will be successful here in
growing electricity demand. On the point of M and A
as well. Actually, again that's been quite interesting this summer.
The greater electricity demand means that a number of the
independent power producers have been bid for, and we're seeing
private equity essentially doing that, four or five deals being
announced over the summer. We also saw equinor the older
(29:23):
stat Oil, taking a ten percent stake in AUSTED So
that's the Danish wind power producer. And we saw Rio
Tinto bidding over one hundred percent to the undisturbed price
to acquire arcadium lithium, so the pure play lithium minor
and producer. So we are stilling to see some M
and A and again that's that's pretty good for us.
(29:45):
We like to see that kind of activity.
Speaker 2 (29:48):
I really I think that those are great things to
call it on that M and A side. I hurting
back to I'm going to get the dates wrong, but
when you think of the big disruption and related to
large cap independence with here here within the US, around
the rise of shale both gas and oil, and just
how that spurred such a robust M and A market
(30:10):
in the energy field for a good sub section of years,
I think it'll be interesting to see if in this
more renewables or new energy landscape, if we're kind of
due for the next stage of M and A or
you know, be it asset swaps or MNA activity, how
that manifests we mentioned you mentioned there in the list
(30:32):
there are quite a few large caps or ultra large
caps majors. How do we think that sort of big
company versus maybe small caps newer entrants do we think
that there's space for these smaller companies to hold their
own and continue to you know, move through this, or
do we really think that this is a space that's
going to be predominantly dominated by the bigger players size
(30:56):
the benefit here or is there space for smaller companies
to be in the next.
Speaker 3 (31:01):
Yeah, I think I'd probably go with trend and say, yeah,
this is going to be big companies mopping up. Yeah,
we see that in the conventional space. That's just been
the history of things. We see that also somewhat here
in the sustainable energy space, but I think we're still
waiting to really see sort of the higher levels of
M and A activity in this area as far as
(31:22):
as far as I can see. That requires somewhat the
likes of the global super majors in oil and gas
to work out exactly what their strategies are, exactly how
they can evolve in the energy transition. The areas that
they're looking at. Is it carbon catch and storage, is
it hydrogen, is it renewable fuels. We're seeing you know,
a fair amount of deals going on there. So yes,
(31:44):
I'd say this is all still very very much in process,
and we again we've tried very very hard, and we
can't always do this all the time, but just to
try to work out what is the intrinsic value of
this thing, not how exciting is the story, but how
how valuable is the asset, how valuable are the cash flows,
and either the stock market will reflect that or there'll
(32:04):
be some M and A activity. It's going to be
one of those two over time. Sometimes it's nice to
see the m and A. And sometimes it's a real
shame when you own a good company that's doing well
that is taken out by a big competitor, and you
know ultimately there've yeah, there's been some value that's been
taken away.
Speaker 2 (32:20):
You mentioned a little bit earlier that you're you're not
quick to move in and out of the underlining equities
just in any rebalance, just because, but you know, rather
seeing it through potentially some of the volatility. When you
think of over the entire lifespan of the fund thus far,
has there been a lot of evolution of those underlining
equities or have there been some mainstays in there?
Speaker 3 (32:40):
Yeah? Sure, so we've had a fair amount of mainstays.
I guess over time, I'm probably plucking numbers out of
the air here a bit, but I would think relative
to five years ago, forty or fifty percent of the
portfolio will will be the same holdings, the same names
in that we've added and we've lost some names through
through sales through M and A. If I go back
(33:01):
over the last five years, I'd say we've increased our
exposure to the States, We've reduced our exposure to the
emerging markets, reduced our exposure to China. Within that, our
European exposure has been broadly flat over that time period.
And then within the sub sectors we've added more in efficiency.
(33:23):
Some of our recent additions have been in areas like
insulation in the United States, manufacturing and installing insulation. We've
slightly reduced our exposure to battery and electric vehicles. We've
reduced our exposure to generation companies, so to the power producers,
and our exposure to equipment has been broadly the same
(33:44):
equipment manufacturers over time. And actually again given some good
performance over that five year period, not not so much
the last eighteen months, but over five years, the market
cap on average has been blending upwards in the portfolio
as well. I think our median mark cap today is
around the seventeen billion dollar level.
Speaker 1 (34:04):
I actually had a kind of a somewhat of a
follow up, you know, in your view, how has responsible
energy investing changed over the past five or ten years?
Speaker 3 (34:15):
Yeah, quite I guess quite a lot. I'm going to
show my age here a little bit. I'm going to
go back a little bit further than that, I think,
you know, I go back to the where would it
have been about two thousand and four, two thousand and
five Goldman's I was part of the sell side research
(34:36):
team covering European oily gas companies, but also writing the
kind of the global research for Goldmans as well. And
I remember the day quite clearly when my boss opposite
and me opened a letter, yep, a letter that he
had received. It was those days, and it was from
the UN. It's from the United Nations. It was a
letter from KOFE NAM to our team asking if we
(34:56):
would write a piece of research about ESG fact us
in the global oil and gas industry. And that was
a completely new thing. That was a completely new what
is ESG? What is the data? We spent probably three
or four months putting together an index, finding data and
doing analysis. So things have really changed an awful lot
(35:17):
in the last twenty years, so the amount of data
that is available, the integration of that data, it has
changed dramatically. So that's the kind of the point of
ESG and responsible investing. I'm sure there will be more
progressed from here as well. And then at the same time,
we've seen the industry evolve in terms of growth of renewables,
the importance of energy efficiency. But even then, still today
(35:40):
we're eighty three percent satisfying world energy demand by fossil fuels,
so this has still got I think a very very
long way to go.
Speaker 1 (35:47):
That'd be great to watch. Thank you again for joining us, Jonathan.
Speaker 3 (35:50):
That's my pleasure. Thank you very much for having me
on BRI.
Speaker 1 (35:54):
Thank you for being my co host today.
Speaker 2 (35:56):
It's always a pleasure, David. I appreciate every invite and
thank thank you very much this time, especially so Jonathan,
because we got to talk energy and I don't always
get to talk that on my day to day so
it's always a pleasure to do that.
Speaker 1 (36:08):
Until our next episode, This is David Combe with Inside
Active
Host
Gina Martin Adams
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