Fund Review: Guinness Alternative Energy

Guinness Asset Management has been investing in energy stocks since 1998, and the alternative energy industry piqued the group’s interest around 2005. After introducing a US version in 2006, it decided to launch the open-ended investment company the following year given the trend of diminishing fossil fuel resources.

Manager Edward Guinness describes the $6.1m (£3.9m) portfolio as a “pure alternative energy play” and his main targets include businesses involved in solar, wind and thermal energy.

For a stock to be considered for inclusion it must have a market cap in excess of $100m and more than 50 per cent of its business must be in the alternative energy sector. “By this we mean companies involved in business relating to energy from non-fossil fuel sources and companies involved in efficiency improvements,” Mr Guinness explains. Given these conditions, the universe from which he can pick stocks is relatively tight, at 250 groups.

The manager typically held about 50 stocks when he started managing the fund, but this has since been reined back to around 30 holdings as his “conviction and understanding of the sector grew”. He adds: “I know the universe quite well and I need a good catalyst to look again at a stock that I have consigned to the corner.”

At present, 35 per cent of the portfolio is dedicated to solar, with 33.5 per cent allocated to wind and 11.1 per cent to hydro companies. A further 3.7 per cent is invested in efficiency firms, with the balance spread across geothermal and biofuel stocks. The holdings are equally weighted and are managed on a “one-in, one-out” basis. He says: “The stock-selection process is a combination of sector selection – deciding how much exposure to give to specific sectors – and stock analyses. We regularly screen for ideas generation. I look at a firm’s strength: its cashflow, return on investment, valuation, and earnings and price momentum.”

Mr Guinness adds that a macro and top-down analysis also come into play. “We look at sub-sectors to find what has attractive growth prospects and what is going to benefit from growth in the next 30 years,” he says. “Fossil fuels are finite and ultimately we need to look elsewhere. We believe we will see higher fossil fuel prices in the future.”

He notes that the energy sector can be politically volatile. “Oil and gas are linked to the alternative energy sector, but they are more sentiment as opposed to an economic driver,” he says.

Unsurprisingly, the fund is considered the highest risk level on a risk-reward scale at level seven, while ongoing charges for the clean retail X-share class are 1.24 per cent.

As is the case with energy stocks – alternative or otherwise – performance has been patchy. The fund is benchmarked against the WilderHill Clean Energy and WilderHill New Energy Global Innovation indices. In the past three years to July 21, the latter yardstick has risen 85 per cent in sterling terms versus the Guinness fund’s return of 58 per cent, data from FE Analytics shows.

The fund lost 27 per cent across the past five years, while the index managed to just keep its head above water, rising 2 per cent. Looking at the wider performance, Mr Guinness notes that performance was robust between 2006 and 2008. But he admits this three-year phase was followed by an “incredibly challenging period”. He says: “The sector performed terribly and 2013 reverted to a strong performance but that was digested a little in 2014.”

The manager currently holds Scandinavian group Nibe, which operates in the domestic heating sector, and Chinese smart meter manufacturer Wasion. On the flip side, he notes solar energy firm Yingli “has a very distressed balance sheet, leaving it vulnerable”. However, while he is not rebalancing the stock, he remains faithful to its potential and has not sold out.

Looking ahead, he says: “I am cautiously optimistic. I think the Chinese solar market is progressing well, and prices and volumes are looking good for these firms. Overall, there will be continued growth in energy demand and alternative energy can provide a ceiling on prices.

“Alternative energy has a relatively fixed cost as the main capital spend is on equipment.”

EXPERT VIEW

Rob Morgan, pensions and investment analyst, Charles Stanley Direct

Since launch in 2007, this niche portfolio has suffered from the derating of the sector and the waning interest of investors. Recent exposure to Chinese solar firms has also been a headwind. However, after a disappointing few years for all energy funds – and renewables in particular – things could be looking up. More settled energy prices, concern over climate change and improving technology of alternative forms of energy make this a potentially interesting play. The portfolio is punchy with 30 equally weighted positions, so has the ability to significantly outperform, particularly if there is a sustained reversal of sentiment towards the sector.