Energy investment is increasingly divided between stable but controversial oil giants and promising but risky renewables. Find out how Guinness Global balances these two worlds with its Guinness Global Energy and Guinness Sustainable Energy funds, and what this means for long-term investors.
Polarization and energy investment options
Investment in the energy sector is increasingly polarized, with two main options emerging. On the one hand, traditional oil and gas companies, which offer stable dividends and a familiar investment framework. However, these companies are under increasing pressure due to their environmental impact. On the other side, sustainable energy sources, such as solar and wind power, promise a greener future, but come with the risks inherent in new technologies. This polarization creates a complex environment for investors, who must balance the stability of fossil fuels with the long-term potential of renewables.
Energy fund management: approach and objectivity
As co-managers, with my colleague Will Riley, of two funds representing these two ends of the energy spectrum, we have a unique perspective. We manage the $362 million Guinness Global Energy fund, which focuses on traditional energy giants. At the same time, we manage the $845 million Guinness Sustainable Energy Fund, which targets companies involved in renewable energies such as solar and wind power, as well as broader areas such as electrification and energy efficiency. What sets us apart is our ability to manage these funds without bias. We don't have a specific environmental agenda; we approach each fund with a clear, objective perspective.
Fund management challenges and strategies
Managing funds at both ends of the energy spectrum raises questions about the objectivity and effectiveness of the strategies applied. The possibility of being truly objective and the risk of overlooking the unique characteristics of each sector by applying a one-size-fits-all strategy are concerns. We believe that our approach, including a rigorous selection process for both funds, enables us to maintain a balanced perspective. In the face of market volatility, we avoid frequent rebalancing of portfolios, preferring to hold our positions a little longer to stabilize investments.
Fund performance and position analysis
The sustainable energy sector has underperformed over the past three years, with the Guinness Sustainable Energy fund posting a return of -11%. However, five-year returns in excess of 97% demonstrate the benefits of long-term investing (all figures in USD as at 07/31/2024). Key holdings in the Sustainable Energy fund include electrical equipment manufacturers such as Eaton (USA) and Schneider Electric (France), as well as wind turbine manufacturer Vestas Wind Systems (Denmark) and Spanish utility Iberdrola (Spain). These companies are well positioned to benefit from the energy transition over the next 10 to 40 years.
In contrast, the Guinness Global Energy fund's main holdings include the five "super-majors" (Exxon, Shell, TotalEnergies, Chevron and BP), which account for around 50% of the benchmark MSCI World Energy index. The European super-majors are currently trading at a discount to their historical valuations, which could offer shareholders an attractive return. The Global Energy fund has significantly outperformed, with a gain of 76% over the past three years.
Future prospects and challenges
For both funds, we adhere to a rigorous selection process, based on data rather than preconceived preferences. We favor value investing, which generally places our funds on lower valuation multiples than our peers. My professional background, starting as a drilling engineer for Shell before moving into the financial industry, gives me a nuanced understanding of the energy sector. Managing two funds with potentially conflicting long-term objectives is a challenge, especially when market conditions favor one option over the other. For example, a drop in oil prices could benefit the Sustainable Energy fund while harming the Global Energy fund.
Oil price forecasts, which are expected to stabilize at around $80 a barrel in the long term, suggest upside potential for the shares of companies in the Global Energy fund, currently valued on the basis of a price of around $68 a barrel. Current expectations appear conservative in relation to this upside potential. For the Sustainable Energy fund, market sentiment is currently weak, influenced by high interest rates and inflation affecting commodity costs. To regain investor confidence in sustainable energy, companies need to improve their results. If this happens, the market could regain faith in the long-term growth of sustainable energy, leading to improved stock performance.
For detailed information on each of the funds, please visit the following links:
This post was translated from the original French.