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