Pictet Clean Energy co-managers Luciano Diana and Xavier Chollet have shifted their focus from the embattled wind and solar sectors to the natural gas boom and firms providing energy efficiency solutions.
With many of their holdings within the energy efficiency sector in the industrials sector, Diana tips them to be relatively resilient whatever the economic backdrop, and to be able to profit from any meaningful pick up in the global economy.
At the end of October, the energy efficiency theme had grown to just over half of the £190 million fund’s holdings with natural gas - split between US and China focused stocks - the other major theme, making up 36.8% of the portfolio.
By contrast the duo are now completely out of wind and solar energy stocks as they believe the sector will face a raft of structural issues for some time.
‘Solar overcapacity continues to be a big problem. Many of the companies in China are propped up by the government. We stopped investing in wind some time ago but kept some wind park operators. We have now exited these but may add slightly to one or two in Spain or Portugal if there are beneficial changes to the tax regime.’
Within the dominant energy efficiency sector, Diana said the key theme was industrial efficiency as companies look to reduce energy costs.
The fund holds the biggest players in the sector through core holdings in Schneider, Rockwell and Emerson Electric but Diana said new positions had been built in Swedish heat treatment specialist Alfa Laval and UK steam treatment specialist Spirax Sarco over recent weeks.
‘All of these companies have a high proportion of recurring levels of income which can give them a level of protection if markets fall and they all need further economic growth to do well.
Within energy efficiency the fund also has exposure to home appliance groups such as air conditioning firm Regal Beloit, AO Smith, the US based leader in water heaters, and insulation group Owens Corning.
‘All of these companies are well placed to benefit from a pick up in the building industry.’
Within the transportation segment of energy efficiency, Diana is positioning to make the most of a renewed interest in autos energy saving specialists Borgwarner and Delfi, and he is also expecting to profit from an uptick in activity around upgrading the US’s electricity grid.
The managers added to smart grid stock Quanta Services and it now makes up around 2.8% of the fund.
Within natural gas, Diana said that most of the fund’s exposure was infrastructure-related, with half in US and half in Asia focused operations.
The boom area in the space has been US shale gas and Diana said that while shale gas currently accounted for a quarter of the US’s energy production, it would soon rise to 45% and the demand for pipelines to convey the gas was increasing.
‘The US needs to connect the East Coast to the Gulf region and due to the low price of natural gas large numbers of natural gas platforms are being built.’
The managers are playing this theme through the fund’s second and third biggest holdings respectively, Spectra Energy and Williams Companies.
China is the other key focus for the fund’s natural gas holdings, with the Chinese government looking to double China’s production of natural gas from 4% to 8% over the next five years.
The fund’s fifth biggest holding is Hong Kong & China Gas which is profiting from the roll out of oil & gas infrastructure across the Chinese mainland and it also owns local operator City Gas.
‘City Gas connects tier two and tier three Chinese cities to the gas network and experienced 20% volume growth this year.’
Since launch at the end of November 2007 to the end of October the fund is down 38.3% although the S&P Global Clean Energy sector is down 84.5%.