The ‘energy transition’ from a reliance on fossil-based fuels to renewable sources is hardly lacking for support as an investment theme.
What has proved a source of controversy and complexity, however, is the best way to invest in this once-in-a-generation growth story.
What is the role of traditional energy providers? What is the best approach to engagement? Where should investors focus their attention for maximum impact?
The £699m Schroder Global Energy Transition Fund aims to cut through much of this noise and uncertainty, investing across the full spectrum of energy transition stocks – from renewable energy generation to infrastructure to manufacturing – on a zero per cent fossil fuel basis.
That means no investments in BP, Shell, Total or any of the other major oil and gas providers, and no investments in fossil fuel-intensive manufacturing companies either – just a pure play on the decarbonisation ecosystem.
See also: The shifting landscape of renewable energy
The fund is still relatively new – launched in 2020, it hits its three-year anniversary this December – yet, during its short life, it has already seen some relatively choppy markets. In common with other vast global shifts before it, stocks involved in the energy transition have been subject to periods of overblown enthusiasm followed by a steady reappraisal.
For some of the popular passive funds, this has equated to a degree of boom and bust. The iShares Global Clean Energy ETF has perhaps been the most glaring example here – tripling in value between early 2020 and early 2021, before dropping around 40%.
For its part, the Schroders fund is striving for a smoother ride, aiming to provide balanced exposure across the various energy transition segments, and to higher quality companies.
“We focus on strong balance sheets,” says manager Mark Lacey. “That keeps the cost of debt down at times when interest rates are rising, but also provides flexibility for these companies at times of volatility in earnings potential. We also look for companies growing their near-term cashflow.”
The team is also careful on valuation, paring back exposure to certain areas when they have started to display bubble-like behaviour – notably on the back of US president Joe Biden’s election victory in 2020.