Nick Anderson and Hamish Chamberlayne, co-managers of the Henderson Global Care Growth Strategy, believe that the transition to a low carbon economy will gather pace in 2016 and that the next decade could be a golden period for active investment strategies. Their thematic approach seeks to invest in companies that are thinking strategically about environmental and social changes, while they aim to avoid those that stand to be disrupted.
What lessons have you learned from 2015?
While it may seem hard to believe, as we approach the end of November, global stock market performance is largely unchanged from the beginning of the year*. Yet underlying market conditions have been anything but stable; the divergence between winners and losers has been extreme. As an example, Amazon’s market capitalisation has more than doubled, surpassing $300 billion (bn), while Anglo-Swiss mining company Glencore has declined by two thirds, losing more than £25bn of value.
Disruption is a popular term right now but with good reason. Thanks to a confluence of factors - such as computing power, the widespread adoption of smart phones, social media, big data, climate change, low cost solar, and advances in battery technology - trends that have been years in formation are really starting to accelerate. The market is punishing companies perceived to be on the wrong side of these trends. Peabody Energy, for example, used to be the largest coal company in America five years ago with a market capitalisation in excess of $20bn. It has declined by approximately 90% this year and is now valued at less than $300m.
Are you more or less positive than you were this time last year, and why?
We are long-term thematic investors. We think we are in the early stages of a transformation to the global economy which will play out over the next decade. Going back to pre-industrial times, the history of economic development has been inextricably intertwined with the availability of cheap fossil fuels; but in the next few decades we are going to transition to a low carbon economy.
While climate change provides a political and regulatory imperative, the reality is this change will be driven by market forces. The pace of cost declines in the solar industry has been so great that solar is now becoming competitive with fossil fuels in many different parts of the world on an unsubsidised basis; from India to Nevada to Chile.
It is not just solar. In the last few years there has been significant progress in battery technology such that fully electric cars and low cost energy storage are becoming commercially attractive propositions. Over the course of the next decade Tesla expects battery power to double, which will provide electric cars with ranges in excess of 500 miles. We expect the upcoming UN Climate Summit in Paris to highlight the fact that this transition to a low carbon economy is profitable and already well underway.
What are the key themes likely to shape your asset class going forward and how are you likely to position your portfolios as a result?
The long-term trends of climate change, resource degradation, growing populations and ageing demographics have not changed. Likewise, our themes do not change very often. We have ten sustainability themes of which five are environmental (sustainable transport, cleaner energy, efficiency, environmental services, water management) and five are social (health, knowledge & technology, quality of life, safety and social property & finance). A key aspect of our strategy is that it is low carbon. As Mark Carney, Governor of the Bank of England, recently noted in his speech to the UK insurance industry, the carbon dioxide contained within already discovered fossil reserves exceeds the two degree carbon budget by a factor of three to five times.
We think the issue of stranded assets is going to become part of mainstream thinking over the next few years. There are significant investment risks to being over exposed to carbon intense businesses and, as highlighted by this year’s performance of the coal sector, the market is already moving to reflect some of these risks. We note how the majority of passive investment strategies have high exposure to carbon. We think the next decade could be a golden period for active investment strategies. With our thematic approach we are seeking to invest in companies that are thinking strategically about environmental and social changes, while we aim to avoid those that stand to be disrupted.
*Source: Thomson Reuters Datastream. MSCI World Price Index, -0.4% in US dollar terms, from 31.12.14 to 23.11.15
Please note: stock examples are for illustrative purposes only and are not a recommendation to sell or purchase any investment.
Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. The information in this article does not qualify as an investment recommendation.