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Climate’s in the hot seat

Chris Salih on how firms have been quick to jump on the climate change bandwagon and introduce funds. Are they a passing phase or will they stand the test of time?

It’s the latest hotspot on both the political and investment radar but advisers are still unsure what to make of climate change and its role in a client’s portfolio.

Several investment firms have been quick to jump on the latest trend, with Schroders, Jupiter and F&C all launching funds into the UK in a bid to capture investors’ imagination as the subject stays in the limelight.

The argument for climate change funds is compelling, particularly as the wider sphere of environmental and ecological investing produced stellar returns in the past couple of years. Figures from Lipper Feri show that 15.2 per cent of all equity sales have come from these sorts of funds in 2007, compared to just 0.6 per cent in 2005.

And with Kyoto signed and the Stern report highlighting concerns across the globe, it is no wonder the perception has changed. But is that enough to tempt investors to part with their money in something still perceived as a niche investment?

Hargreaves Lansdown head of research Mark Dampier says it is something that will need time to bed in before there is enough confidence to invest full throttle.

He says: “There is clearly something in these fund launches from the likes of Schroders but the worry is that they are the latest fad based on political opinion and have yet to stand the test of time.”

Schroders’ global climate change fund – which launched at the end of September – is innovative in a number of ways as not only does it look at solutions to climate change, it also focuses on companies who will look to benefit as the world seeks to adapt to rising temperatures.

Chief investment officer Alan Brown believes the world has reached a “tipping point” both in public and political terms while co-manager of the fund Simon Webber believes that it will be the main investment theme of the next 20 years as it seeks to benefit through the five main themes of energy-efficiency, low-carbon fossil fuels, clean energy, sustainable transport and environmental resources.

Alan Steel Asset Management principal Alan Steel does not buy into the climate change argument, describing it as a political excuse for more taxation.

He also believes that his-torical events indicate that global warming may not necessarily be a bad thing.

“When you consider that in the 11th and 12th centuries Greenland had grapes growing everywhere you can see that this sort of thing has happened before. If this is the case and more crops grow why not invest in the likes of an agriculture fund, which Schroders also has as a Sicav offering.”

Steel says the bottom line is these funds have to make money and points to the Jupiter environmental team’s strong track record as the safest bet in the market. Jupiter recently launched an onshore version of the group’s climate change solutions fund into the market off the back of nearly four years success as a Sicav.

Fund manager Charlie Thomas says the fund has about 85 per cent of the same stocks as the ecology fund, with the rest coming from healthcare stocks which the group claims fall inside a climate-change umbrella that is bigger for some firms than others.

Schroders, Jupiter and F&C are all adamant that returns are the primary goals of these funds, with none operating any sort of screening and all of them moving away from the ethical stance.

So which sectors are most likely to benefit? UBS published a report back in June called ‘Reacting to climate change’ in which it listed some expected and some surprising winners and losers. It said sectors such as chemicals, pharmaceuticals, technology, insurance, electricals and engineering would be positively affected, while automobile manufacturers and telecom companies would be viewed negatively.

Taking telecoms as an example, the report said they could suffer as very large users of energy, while the actual infrastructure of telephone lines could suffer badly in extreme weather.

F&C director of strategy and communications Jason Hollands says there will be both a positive and negative impact on all sectors. He says that while the Government is looking to get people out of their cars by increasing fuel prices there will still be winners in the sector, as some will look to launch energyefficient vehicles for people.

However, there are concerns over volatility, as indicated by the fund launches from the likes of the Merrill Lynch new energy trust which, since launch back in 2000 saw it shares plummet by some 75 per cent at one point. However, if you had invested three years ago you would have a return of 182 per cent.

Fund manager Rob Batchelor says: “We recognise there is always a risk with these type of vehicles, but the number of political changes have solidified the market for environmental investing.”

Rowan & Co Capital head of research Tim Cockerill says that he would tend to stick with a vehicle such as Impax environmental markets – which invests globally by focusing on energy, water and waste services – simply because it is too early to invest in a fund that invests purely in climate change.

He says: “There is a bandwagon feel to them, which is reminiscent of the technology boom meaning advisers should be cautious. They will form a central part of a client’s portfolio, but for now its just the tip of the iceberg.”

Dennehy Weller & Co IFA David Mitchell believes climate change is too much of a gimmick to warrant big investment.

“There’s nothing to stop a manager touching the area in terms of stock exposure for almost all funds. It may be a nice idea from the moral standpoint but as an investment-led product, you still have to question how sensible they are and whether they will wane over time.”

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