Avoiding coal in favour of joules this Christmas

21st December 2017 by Darius McDermott

FundCalibre’s managing director Darius McDermott discusses going electric this Christmas.

It’s the time of the year when carols are sung, the fairy lights come down from the attic and parents make the most of (at least temporarily) well-behaved children who are keen not to find themselves on Father Christmas’s ‘naughty list’.

The prospect of receiving a stocking full of coal has never been a particularly appealing one. But, as electric vehicles become increasingly commonplace and society becomes more environmentally aware, would this now be more of a disappointment than ever before?

It is a common theme also being played across fund managers’ portfolios, as many investors have increased their exposure to alternative energy sources, greener products and electric vehicles over the years.

The question from an investment perspective, though, is whether these market areas have already reached their peak in growth acceleration. According to data from Gravis Capital*,  operational clean energy assets already contribute 24% of world electricity requirement.

Does this mean investors may have missed the boat when it comes to investing in cleaner energy, or is the growth we have already experienced just the tip of the iceberg? And, if there really is a greater growth trajectory on the cards for electric vehicles, does this mean investors should reduce their exposure to oil?

Tim Guinness, Jonathan Waghorn and Will Riley – managers of the Chelsea Selection-listed Guinness Global Energy fund – forecast in a recent report** that the sales of electric vehicles will grow from 0.8m units in 2016 (which is 0.9% of total vehicle sales) to 5.5m units in 2020 (which is 5.3 per cent of total sales).

By 2030, they believe the proportion of total vehicle sales which are electric cars could rise to 50%.

“As electric vehicle adoption progresses over the next 10 or 15 years, we must acknowledge that the fuel efficiency of the internal combustion engine portion of the market will improve, which will put further pressure on oil demand growth from the fleet,” the managers said.

“On the other hand, around 50% of electric vehicles are being sold as hybrids (a figure that likely declines over time), which will still generate significant gasoline and diesel demand.

“Taken together, we believe a growing fleet, improving fuel efficiency and electric vehicle penetration, all points to oil demand from cars and light vehicles peaking in the mid to late 2020s.”

So while there are indeed still good investment opportunities in the oil & gas sector over the medium term, exposure to electric vehicles could also be a good option for investors.

Tom Slater and James Anderson, who manage the FundCalibre Elite Rated Scottish Mortgage investment trust, have been investing in electric vehicle giant Tesla since 2013. It is currently the fourth-largest holding within their portfolio, accounting for a 6.4%*** allocation overall.

Not only is the stock exposed to the electric vehicle market, it also acquired US solar panel installation company SolarCity at the end of last year.

This could be particularly prudent, given that 30,000 solar panels are expected to be installed every hour over the next five years, according to Gravis.

Meanwhile, Ainslie McLennan, co-manager of the FundCalibre Elite Rated Henderson UK Property fund, is playing the rising popularity of electric vehicles through her allocation to warehouse retail parks.

Some of her holdings have started to install electric charging points as a means to entice consumers to “linger for longer”; as they charge their vehicles, they are more likely to spend time and money in the surrounding shops.

The £2.9bn fund currently has a 29.7%**** allocation to retail property, with Robin Shopping Park in Wigan and Dalton Park in Durham accounting for some of the portfolio’s largest individual weightings.

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Darius’s views are his own and do not constitute financial advice.

*Source: www.graviscapital.com, Clean Energy presentation November 2017

**Source: Guinness Global Energy Report, August 2017 http://www.guinnessfunds.com/wp-content/uploads/2017/08/2017.08-Guinness-Global-Energy-Fund-Managers-review.pdf

***Source: Baillie Gifford fund fact sheet, 31 October 2017

****Source: Henderson fund fact sheet, 31 October 2017