The economy of the future is going to be cleaner, healthier and safer and that is a trend investors can back, according to Liontrust Asset Management’s Peter Michaelis.
Michaelis, who co-manages the £247.3m Liontrust Sustainable Future Global Growth fund alongside Simon Clements, said energy companies reliant on fossil fuels that fail to adapt their business models to the energy in transition trend are going to increasingly lose market share and will disappear sooner than later.
“The direction of economic development lies in the quality of growth rather than just the quantity,” he said.
“Companies like GE [General Electric] tie themselves to coal fire fossil fuel generation; their turbines were specifically for that.
“Over the last two years GE has lost 75 per cent of their shareholder value because it’s fighting against this theme: no one is building any power station anymore.”
Given the possibility of these companies to adapt their business models to a greener way of producing energy, Michaelis noted it can be difficult for many leaders in the industry to change in response to market shifts.
“The crazy thing is that GE had wind generators and whole divisions based on energy efficiency, but they just couldn’t kill their incumbent business,” the manager explained.
“We often get asked: ‘Won’t the big businesses of today just adapt and fossil fuel and oil companies become renewable energy companies?’
“Historically, they don’t. Kodak invented the digital camera, they had the pattern, but they couldn’t see a world that had the film in it, they failed to adapt, and they died. You can think of Nokia as an example of smartphone company as well.”
Performance of stock over 5yrs
Source: Google Finance
According to the Liontrust manager, there is no doubt electricity is going to be the dominant energy source going forward.
But while most people take for granted the availability of cheap fossil fuel energy, climate scientists have advised governments that renewables should be the world’s dominant source of energy by 2025.
This comes after research by the Global Carbon Project showed global carbon emissions will jump to a record high by the end of 2018, sharply up on the plateau from 2014 to 2016 and the rise in 2017.
“We take for granted the availability of cheap energy but 80 per cent of the energy we use comes from fossil fuels which has been great for the last 100 years except for the dark side of fossil fuels: carbon dioxide and the pollution and effect of this in the atmosphere,” Michaelis said.
“This is what is leading to climate change. However, all the nations have agreed that we need to decarbonise our economies to avoid a very costly impact.
“The rate of decarbonisation has to be very rapid. Many people think this is never going to happen, but we disagree: we think we are in the midst of that transition.”
While electricity continues to be mainly generated by fossil fuels, Michaelis said renewable energy capacity additions are exceeding fossil fuel generation investments by a widening margin.
Electricity capacity additions by fuel
Source: International Energy Agency
“In 2016 if you look at new capacity invested in electricity two thirds was in wind and solar globally. we usually call these alternative energy sources, but they are not alternative energy sources any more, they are the dominant energy source for new electricity generation,” he said.
“When we launch our Sustainable Future fund, people used to say: ‘Come on, it is never going to happen or have a major impact at all’.
“We go forward 17 years and at the cost of £2.2tn we’ve put on 1,000 gigawatts of capacity in wind and solar. If you put that into perspective the UK has around 50-gigawatt electricity demand or capacity: this is pretty good news.”
Michaelis noted most forecasters underestimate the growth of green energy sources, mainly due to their preference for linear graphs in their predictions.
“Forecasters love to use linear graphs, but if you look back in history, linear graphs are very rare. What happens is that eventually you get technology that is better and cheaper and you get an S curve and you suddenly get displacement,” the manager explained.
“That happens very rapidly, and we think we are in the middle of that, we can see what’s coming down the pipe in the next four years: we will put another 1,000 gigawatts, we will do it in a quarter of the time and for half the cost.”
He added: “Also, if you were the CEO of an electricity-generating company you have the option of building a coal fire power station or a nuclear power station and committing enormous amounts of capital into that.
“But you are seeing your main competition getting that cheaper and cheaper every year. As a CEO, you are going to be thinking: ‘fossil fuels are a risky investment to make’.”
Over five years, Liontrust Sustainable Future Global Growth has delivered a 77.32 per cent total return compared with a 58.93 per cent gain for the average fund in the IA Global sector and a gain of 77.33 per cent for the MSCI World index.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
The fund has an ongoing charges figure (OCF) of 0.93 per cent.