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1. Higher interest rates (and inflation) affect bond prices immediately; however, they take longer to work their way into equity markets. Environmental strategies, which are overweight capital-intensive sectors by nature have been reacting more recently to a rate cycle increase that started early last year. At the same time, technology and other “capital light businesses” seem oblivious, at least so far! It matters because recent global benchmark performance has mostly come from said technology stocks, ones that have absolutely nothing to do with the environmental economy. Even the FTSE Environmental Index which we include in the Fundsheet contains some of these. Microsoft alone accounts for 11% of the index! In hindsight, I wish we had not chosen to switch from the lesser known Cleantech Index we used until three years ago – it is down 8.4% this year and is probably a better benchmark for our strategy.
2. Geographic allocations also affect relative performance. As many of you know, we have historically found better environmental businesses, at better valuations, outside the United States. Our US allocation has rarely exceeded 25% and currently sits at 21%. Yet the broader benchmark we report against, the MSCI ACWI, currently has 59.3% allocated to US constituents. Last year being overweight Europe, Asia and emerging markets helped our relative performance, this year it’s hurt.
3. Cost inflation has affected renewable development economics particularly hard in 2023. In fact, we know several companies that have simply walked away from huge offshore wind projects, even paying penalties to do so. While solar has generally fared better than wind, and overall global installations will increase again this year, the higher margin rooftop business will account for less share. At the same time, geopolitics and tariff wars are inflating what should be declining prices for solar equipment. After several strong years, the S&P Global Clean Energy Index is down -29% year to date. Thankfully, transitioning to more integrated power utilities over the past few years, albeit ones with significant renewable portfolios, has spared us some of this pain.
4. Recent developments at three Greenchip holdings have also hurt. United Natural Foods (UNFI), our best performing stock two years ago, has reported very poorly this year. Fundamentally, UNFI runs a food distribution business that has found itself getting squeezed between higher farming/food costs and grocery businesses under political pressure to freeze prices. After a significant drawdown we believe the stock is now trading a discount to what we think it is worth. That said, we’re not convinced management has the right strategy to see it realize that value. It is under review. Two other stocks, Siemens Energy and Alstom, reacted very negatively to what we believe are more temporary challenges. Siemens faces a recall/charge for one of its turbine models, while Alstom announced a series of payment delays that will affect near term cash flows. We believe both companies will overcome these challenges and remain committed to the holdings at these prices.
5. We’ve been through periods like this before – they’ve been mere blips in the great energy transition. The realities of a crowded planet, finite resources, and ecological challenges will continue to drive demand for the solutions our holdings provide. Today, we can add energy security as potentially an even more powerful fourth driver.
6. Valuations have never been more attractive. The discount between our estimate of intrinsic value and market prices is currently 35%, the highest it has been since inception.
Commissions, trailing commissions, management fees, and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual fund securities are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that the fund will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you. Past performance may not be repeated.
This document may contain forward-looking information which reflect our or third party current expectations or forecasts of future events. Forward-looking information is inherently subject to, among other things, risks, uncertainties and assumptions that could cause actual results to differ materially from those expressed herein. These risks, uncertainties and assumptions include, without limitation, general economic, political and market factors, interest and foreign exchange rates, the volatility of equity and capital markets, business competition, technological change, changes in government regulations, changes in tax laws, unexpected judicial or regulatory proceedings and catastrophic events. Please consider these and other factors carefully and not place undue reliance on forward-looking information. The forward-looking information contained herein is current only as of September 30, 2023. There should be no expectation that such information will in all circumstances be updated, supplemented or revised whether as a result of new information, changing circumstances, future events or otherwise.