Will Low is bullish on the clean energy transition.
But the Nikko Asset Management global equities portfolio manager highlights a “paradox” buried in the green energy story.
“We need more alternative energy sources,” Low said, “but we also need more fossil fuels now to build the enormous amount of infrastructure necessary for any transition.”
Green hopes like wind, solar and hydrogen are much less energy-intense than fossil fuels, he said, requiring “a lot more stuff” to produce an equivalent output.
The pace of transition will also hinge on the cost of capital, which has increased of late amid inflation and rising interest rates.
How investors – and society – accommodate the alternative energy paradox varies but the Edinburgh-based global share manager has a foot in both camps.
According to Low, the Nikko portfolio has exposure to “picks and shovels” companies supporting fossil fuel infrastructure and the growth of more efficient alternative energy production.”
He cites the example of ASX-listed engineering giant, Worley, which is involved in building traditional fossil fuel paraphernalia such as pipelines and terminals while simultaneously driving innovations in hydrogen and wind technology.
Worley represents just under 3 per cent of the Nikko portfolio, which currently holds about 45 stocks framed around the manager’s ‘future quality’ criteria.
In NZ last week for the Nikko roadshow, Low said the investment philosophy hinges on four “pillars” ranking companies on the quality of:
- franchise – or the brand strength relative to peers;
- management team;
- balance sheet; and,
- future valuation (including cashflow growth).
Some of those old-fashioned concepts (profitability, for example) may come back in vogue as the air seeps from the free-money bubble.
Despite its bottom-up approach, he said Nikko does take account of macro-factors including the rapid rise in short-term interest rates from zero to 5 per cent that will define some “winners and losers” in changing times.
“There has clearly been a bubble in speculative tech stocks and business models that have no realistic path to profit,” Low said.
He said the Nikko global share portfolio is positioned for the next cohort of winners in sectors including travel, healthcare, emerging markets financials as well as the energy transition.
“We’re less excited by companies that are not solving new problems,” Low said, like last-phase favourites Alphabet and Meta that are over-reliant on digital advertising.
The online advertising boom that fueled mega-profits for Meta etc is coming under pressure, he said, partly as the venture capital-funded start-up sector stalls.
“Venture capital investment in start-ups dropped from US$650 billion to US$300 billion in a year – and a lot of those start-ups would usually burn cash on digital advertising.”
Low said the Nikko team conducts detailed research on about 100 global stocks out of perhaps 500 that fit the ‘future quality’ criteria before winnowing down the actual portfolio to between 40 to 50 companies.
“We had an annual turnover rate of 30 to 35 per cent over the last five years,” he said.
Since inception in 2017 to the end of last year the unhedged NZ version of the Nikko global shares fund returned about 11 per cent (after fees and a 28 per cent PIE tax) versus an amended MSCI benchmark of 9.74 per cent.
Nikko launched the concentrated international equities strategy in 2014 after luring Low and six other portfolio managers from the Scottish Widows business following its purchase by Aberdeen (now known as Abrdn).
Overall, the Nikko global shares fund holds some US$3.6 billion.