Wealth DFM: What has the performance from an investment perspective been like over the last few years?
Chris Mellor: As ever, the caveat is past performance isn’t a great guide, but it is an interesting illustration. So if we look at the very sort of short term picture, last year, 2020, we saw very strong outperformance. The index that we’re tracking was up almost 150% over 2020, compared to just slightly north of 15% for the broader equity market index. However, it has been followed by a correction more recently. From the start of this year, performance is down almost 25%. So, you could say, it’s been a very big up and a pretty sharp down. The Covid pandemic has focused attention on some of the key questions that we’re asking about the world around us. It’s focused attention on ESG and climate change. I think there was probably a degree of excess and exuberance in the 2020 performance. And the correction this year probably helps to improve the long term outlook for an investor in the space.
Again, if we look over the very long term, the index that we’re tracking has performed, broadly speaking, in line with the global equity market. However, within that, there have been some periods of significant outperformance, as there was last year, but also some periods of prolonged underperformance as well. The two key bouts of outperformance, were, last year, but also if you wind the clock back to the late noughties prior to the financial crisis period, we again saw a boost of demand for clean energy solutions.
The difference between now and then is that the demand and the growth of interest in clean energy then was driven very much by a degree of policy diktat. There were significant subsidies of the clean energy space and governments pushing to try to drive the growth in things like solar, wind etc., despite the fact that they were much more expensive than other more carbon intensive energy solutions.
The difference this time is that over the last decade or so, the price of solar and of wind energy production has fallen dramatically. We’re in a position today where solar arrays being built are the cheapest form of energy available, cheaper than any other new build carbon intensive solution. So we’re not talking about subsidy anymore. We’re talking about a real economic justification for these technologies to be deployed.
And when you couple that with, the strong push from governments and the requirement for significant investments in clean technology in order to reach our climate goals, you’re not talking about a multi[1]year growth story for clean energy. It’s actually a multi-decade secular theme that you’re talking about. So perhaps the ups and downs of the short term performance will pale into insignificance versus that longer term story.
Wealth DFM: Finally, are the market leaders in the clean energy space concentrated in a particular area of the world or are they fairly well spread geographically?
Chris Mellor: In terms of companies, it’s actually a pretty broad global spread. If you think about the development of the clean energy story, if we take solar, for example, the first solar panel was happening in places like Japan with an expansion to places like Germany and then to other developed markets. Now, the largest investment in solar panel and solar use is in China and a lot of the providers in that solar space are based in China. A globally invested index or globally invested portfolio is definitely the way to go here. There are a number of products out there that offer perhaps a more US bias, but our approach is to offer that global exposure because the opportunities exist in markets across the world.
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Investment risks
The value of investments, and any income from them, will fluctuate. This may partly be the result of changes in exchange rates. Investors may not get back the full amount invested.
Investments into the clean energy sector are considerably exposed to investment trends focused on environmental factors and may have sensitivities towards ESG related government regulations and tax implications.
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