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Eco Investor September 2015 International Shares Turnaround Leads to All Time HighIn August the unit price for Australian Ethical's International Share Fund hit an all time high of $1.067. While this is commendable, also noteworthy has been the huge turnaround in the unit price since the Global Financial Crisis when the $1 units were at an all time low of $0.51 in late 2011 and again in mid 2012. To find out about the turnaround, Eco Investor asked the Fund's portfolio manager, Nathan Lim, who took over management of the Fund at this time, in August 2011. Eco Investor: What were the drivers of the recovery in the Fund's unit price, a recovery in cleantech shares after the GFC, the overseas political and investment climate for clean tech, stock selection, something else or a combination?
Certainly post the GFC, cleantech and renewable energy stocks have enjoyed a period of strong returns, but it was not immediate. The market, as represented by the MSCI World Index, reached its absolute low in March 2009. Cleantech and renewable energy stocks did not reach their low until mid to late 2012. Just as policy support was being withdrawn in the period immediately after the crisis, policy support returned only after the bottom was well and truly in. At the time, we liken the situation to Maslow's hierarchy of needs. With unemployment skyrocketing and people struggling to get by, the policy focus was on getting people back to work and providing financial relief. Rightfully or not, many environmental policies were deemed unimportant in the face of the collapsing economy and unsurprisingly were slashed. Good examples of this occurred in Italy and Spain. However, once the panic was over, attention returned to the environment and policy support re-emerged. The Fukushima Daiichi nuclear disaster in March 2011 added to the policy push as nuclear power was no longer going to be the carbon-free solution to climate change. A new energy mix had to emerge. Besides the return of policy support, the cost of renewable energy, solar in particular, collapsed. This lay the foundations for a return to profitability for the renewable energy sector as surviving companies saw rising orders, expanding margins and balance sheet repair. Eco Investor: Which sectors are leading the way and which sectors are lagging? Nathan Lim: Since bottoming in 2012, our best-performing sectors have
been wind, geothermal and energy efficiency. Energy infrastructure companies
(think poles and wires) have lagged as their defensive qualities worked
against them in a rising market. Recycling stocks have also underperformed
as the underlying commodity prices that support their business models
have continued to fall. Nathan Lim: Geography is a big issue. From a renewable energy perspective, China is one market, and the rest of the world is another market. Chinese manufacturers dominate the China market. The rest of the world has a mix of players from different countries. From an investor's point of view, this is your first question: Do you want to invest in China or not? We have for the most part stayed away from China, but recently added two investments with significant Chinese exposure: JA Solar and Goldwind. Eco Investor: What is the Fund's policy on distributions? Is a distribution in sight for the Fund? If so, what is the likely time frame? Nathan Lim: As you noted earlier, we only just recovered to our original issue price of $1, so we still have a lot of losses to work off. We will review our distribution policy once it is appropriate but suspect that will not be for some time yet. Eco Investor: Do you have any other comments on international clean energy, politics, innovation, funds management, the Fund, or cleantech in Australia? Nathan Lim: The biggest frustration we have at the moment is the positive correlation between the oil price and renewable energy stocks. We believe oil and natural gas prices have little bearing on renewable energy as we are seeing companies bidding on power purchase agreements (PPAs) at prices below what a new build natural gas or coal-fired power station can deliver. We have endured much pain in solar stocks this past year but remain confident in the solar/ renewable energy industry in the long term. Detractors are also highlighting the impending expiration of the US Investment Tax Credit (ITC). In previous policy cycles, the expiration of major US policy initiatives did indeed lead to poor industry conditions. The boom/ bust cycle in the wind industry created by the Production Tax Credit is a good example. We believe circumstances for the industry are different this time. Whereas previously the renewable energy market was dominated by the US and Europe, there are now many more countries in the world that are joining the "gigawatt class". For example, Brazil installed 2.4 gigawatts of wind last year, about half of what the US installed. Japan was the second largest market for solar in 2014 with 9.7 gigawatts, passing Europe and the US at 7 and 6.2 gigawatts respectively. The point is renewables have gone mainstream and are increasingly cost competitive. The expiration of the ITC will undoubtedly have an impact on US sales, but the industry does not solely revolve around this market anymore.
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Nathan
Lim: I am a bit embarrassed to mention this factor and will be the first
person to admit there was an element of luck in it, but I took over management
of the fund in August 2011. If you feel it is important to mention that
as a factor, I will let you decide whether to include it in the article.
