But the fund’s exposure to China is indirect, for example through US and European electronics component manufacturers which sell to China. On Semiconductor and NXP are two such companies and are among the top ten holdings. About 75% of the fund’s assets are invested in North America and Europe combined.
China is under-represented in the universe of investible clean tech companies, and the firm is not invested in A-shares, Diana said. “[With China-based companies] transparency can be an issue, as well as investor relations.”
__________________________________________________________________________
Luciano Diana vs Peer Group
Source: FE
__________________________________________________________________________
Clean tech risk
One risk to clean tech would seem to be falling oil prices. As oil gets cheap, so does gas, and people shift back to old habits buying gas guzzling cars as energy efficiency becomes a lower priority.
Oil had some impact on the fund, but Diana said is was temporary.
“When oil prices went from $110 to $45 we did see selling in some parts of the portfolio such as auto components. We used that as a buying opportunity because we believe efficiency standards won’t change.
“Fuel efficiency trends are long-term and we’ve seen no evidence that any government is thinking about making the standards less stringent.”
With renewables, solar companies have had some spectacular collapses. In the US, Solyndra, a government-subsidised Solyndra and China’s Suntech Power are two examples.
“Solar has a history of bankruptcies that makes us cautious on China. But things have changed. In the past, China was exporting panels and components to the world. Now that has diminished because it has a huge domestic market to feed.
“There’s a lot more choice in solar compared to a few years ago, when investing in the solar value chain meant exclusively investing in manufacturers.”
Government subsidies for renewables, particularly solar with feed-in tariffs, are another risk because they can be turned on and off for political reasons.
Diana counters that subsidies are becoming less relevant as technology costs decrease. Solar in sunny regions like California and Italy are becoming competitive with electricity grid prices.
He said subsidy risk to the fund is low. The portfolio has decreased exposure to renewables to 20% from 50% in 2008, he added.
“Even if we had a complete reversal of policy on renewables, the effect on the portfolio would be limited. The bulk of the portfolio today is focused on energy efficiency companies, which are typically not driven by subsidies but by economic decisions.
“Governments impose standards for efficiency in cars and household and industrial equipment that force the private sector to gain competitiveness. The standards have no cost to government. This is very different from feed-in tariffs.”
Diana said the key risk to the fund is “a global synchronised recession that reduces electricity consumption by 3% year-on-year and causes the middle class in developing countries to pullback on car buying as manufacturing activity plunges.
“But that’s not a base case. There is a willingness to have cleaner economic growth, even among developing countries, and there’s no turning back to the past.”
