Those of you who know me well might be surprised to see me writing about a clean energy fund as I am not particularly known for my ethical or environmental beliefs.
For a fund of this nature to attract my attention, it must be something special.
Before we move on to the fund in question, it may be worth talking about the sector and its prospects. Oil is in finite supply and alternative sources of energy will be needed. Hydrogen fuel cells could be the energy of the future but remain unproven.
However, there are many clean energy sources that work, are being used and are profitable. Solar and wind power are just two examples and this fund looks to take advantage of the opportunities.
Pictet is one of the 10 biggest Swiss private banks with euro235bn in funds under management. Clean energy fund manager Philippe de Weck has been with Pictet since 2004, having previously beena sector analyst at CSFB covering areas as diverseas pulp & paper and telecoms. He is joinedby Philippe Rohnerand Gabrielle Micheli.
If you were to look at this fund diagrammatically, you would see that it sits in between environmental and energy. Its sweet spotis where the two cross.
Eight areas are covered in this fund – wind, solar, hydroelectric, biomass, geothermal, ocean, natural gas and energy efficiency.It looks for the interaction between environmentand energy but only where companies have a proper business model.
One thing that De Weck was very clear about whenI met him is that this is nota new energy fund and it is not stuffed full offuel cell companies.
There are three drivers for the clean energy fund – the environment, energy supply and energy independence. The fund avoids companies thatare dependent on high oil prices to make their energy economically viable.
An interesting fact about oil is that it is hardly used for electricity generation – only 8 per cent. However, 34 per cent of the world’s total energy supply is dependent on oil, with only 3.1 per cent from new renewable sources anda staggeringly small 0.14 per cent from solar and wind power.
One obvious question is can these areas really become a major force in years to come? De Weck replied that it was only just over 100 years ago that oil started being used as an energy source and look where we are now.
It is predicted that over half the world’s energy usage will be generated by solar electricity by 2100. Over the next decade, revenue growth of 16 per cent a year is predicted for the solar sector.
Pictet has a range of sector funds that are managed with a proven process. De Weck has identified 750 companies with a total market cap of over $5trn that can be classified as carbon-free energy companies, low-carbon energy companies or energy efficiency companies. That universe is narrowed by filtering out those companies that have less than 20 per centof sales or earnings in these clean energy areas. This leaves 440 companies. Pictet use filters to narrow that number further.
Each of the companies starts off at an initial weighting of 6 per cent in a theoretical portfolio. Four factors are then considered to come up with a neutral weighting. These are complexity, liquidity, volatility and industry. These four areas are negatively scored, with a perfect score reducingthe weighting by 0 per cent.
For example, when considering complexity, if the company is 100 per cent clean energy-related, there will be no deduction. However, if this figure is 20 per cent or under, thenit is likely to take away 6 per cent from the company’s weighting. Looking at liquidity, if it is a small-cap company, there will clearly be a deduction of up to 6 per cent in the weighting.
Once these four factors are scored, a neutral weight is determined. Companies with a weighting greater than 3 per cent are considered core holdings while anything under could be an opportunity.
Pictet’s alpha factor is then determined. This scores the company on the business franchise, management, valuation and momentum, which is then added to the neutral weighting to give a final portfolio weight.
De Weck is aiming fora total of 50 to 80 companies in the portfolio. This is a completely bottom-up portfolio and any sector or geographic weightings are driven through fundamental analysis. There is naturally a large-cap bias as the liquidity factor scores negatively for small-cap companies. De Weck thinks this is a growth fund but it is sensitive to valuations.
There is growth potential for this sector. Combine that with the undoubted will of governments and supra-national bodies and you can see the potential for profit.
This is fine as long as companies are invested in for sound financial reasons. De Weck’s background as a sector analyst helps, as does his interest in the area. This could be an interesting addition to a portfolio.
Ben Yearsley is investment manager at Hargreaves Lansdown