Adventurous Investor

December 11, 2009 5:26 pm

Environmental packaging

I’ve long admired the chutzpah of fund marketeers. When Tesco has to market anything, it faces a relatively simple brand challenge: make a product sound cheap and convince consumers to buy it. By contrast, fund marketeers can sell only the potential for small incremental gains, and may require customers to pay more for them!

One of the easiest sales pitches in these circumstances is to take a “big theme” and then sell the heck out of it by promising some amazing competitive edge. If China is “the biggest story the world has ever seen”, wouldn’t you want the best manager
running your fund? That might be the pitch from Fidelity, for instance.

Another favourite pitch is to take climate change and convince investors that they must get a piece of the action: cue lots of cuddly images of children hugging trees and photographs of wind turbines.

However, the problem with all this big-picture marketing is that it ignores the fact that packaging investment ideas in nice, simple boxes is rather tricky. Rolling out the
carbon-lite economy is possibly the greatest global infrastructure challenge of the century – it will consume vast amounts of money and transform our way of life, but that doesn’t mean you’re guaranteed to make money out of it.

Creating an investment strategy out of this big story is also tricky in terms of what you choose to invest in, or exclude.

Take Virgin’s Climate Change unit trust fund. Peculiarly, it includes oil companies – good, decent, progressive oil companies, sure, but carbon-producing, carbon-emitting oil companies nonetheless.

Even a simple trackerfund approach is problematic. I like cheap, transparent exchange traded funds (ETFs). But the indices that environmental ETFs track are complicated and very distinctive: most consist of a limited number of the sexiest solar and wind power companies, which are usually trading on inflated earnings multiples, and give only a nod to boring themes such as waste or energy efficiency. Click here to download David Stevenson’s excel spreadsheet of environmental ETFs and the indices they track.

My worry is that the most compelling investment stories are likely to be the most boring: waste and gasification projects, smart grids, smart meters, water infrastructure.

But now there is a credible new competitor in this space. Start-up investment boutique Osmosis is set to launch a Climate Solutions ETF at the end of January.

This is a physical-replicating ETF (ie, it doesn’t use derivatives to achieve index exposure but physically holds the shares), tracking an index run with HSBC, containing an equal mix of clean energy companies, energy efficiency specialists and waste/water companies. In fact, a chunky 16 per cent is invested in both waste (companies such as Shanks) and water (companies such as Pennon). In all, there are 100 companies in the index with no company comprising more than 2.5 per cent of the total holdings. An annual management charge of 0.7 per cent for the ETF is not the cheapest – but fairly low.

However, environmental specialist Impax hasn’t been resting on its laurels. It launched an Asia-specific environmental markets investment trust at the end of October. It is still early days for this London-listed trust, but I think its approach is compelling.

In China and India, reliance on imported oil is already a major issue for governments, blackouts are common, urban air quality is dreadful, and plentiful drinking water increasingly scarce. Water and sewerage are a problem too: 93 per cent of waste in China goes into landfill sites, against just 5 per cent in the Netherlands, and China’s water capital expenditure is estimated at $55bn.

Environmental solutions can be cost-effective, however. Asian governments are increasing their spending, and labour costs are low. Impax cites the manufacture of solar cells where the cost (excluding silicon) is $0.30 per watt peak in China and $0.60 in Europe.

Impax’s fund managers identified around 350 shares in partnership with their local co-managers, Aji, and then narrowed it down to 30 to 60, selected for “growth at a reasonable price”. The split is: 32 per cent energy efficiency;
21 per cent water; 23 per cent waste. With the liquidity of a listed vehicle and a relatively low annual charge of 1 per cent plus performance fees, it compares well with the Osmosis ETF.

Triodos share issue
Investors looking for a specific investment opportunity in wind power in the UK can buy new shares in one of Triodos Bank’s renewable energy vehicles. Triodos is looking to raise £7m from the issue, to be concentrated on seven projects in the UK, including a major north Wales wind farm project due to come on line in 2010. Triodos is aiming to become a major player in the UK alternative energy sector, alongside the Ventus VCT funds from Climate Change Capital.

adventurous@ft.com

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