Colin Stone, the manager of Fidelity European Opportunities, invests in solar power, which he says promises sizzling returns. He also favours healthcare and internet businesses
Fidelity sent five analysts from both Boston and London to a solar power conference in Spain. They said that we have barely scratched the surface of what is likely to be a major new profit-spinning industry, and one where Europe is taking the lead. Colin Stone, manager of Fidelity European Opportunities, could hardly be described as a climate change fanatic. He started his career as a petroleum engineer before joining Fidelity in 1987 as an oil analyst.
What impresses Stone is the chances of solar power reaching “grid parity” in just a few years’ time. Grid parity is achieved when the generation and transmission cost of an energy source is equal to the average price of other energy sources. In Spain it looks like solar power will reach grid parity by 2011. Cloudy and soggy Britain is never likely to receive much of its energy from solar photovoltaic cells. But globally the opportunities elsewhere are immense.
Stone holds both Germany’s Q-Cells and Norway’s Renewable Energy Corporation in his portfolio. He also has Denmark’s Vestas Wind Systems among his top 10 holdings. “Government spending [in Germany] has helped jump-start the industry. Without subsidies, the whole industry would be many years later in reaching parity with fossil fuels.”
Crucially, Germany forced its utility companies to pay a feed-in tariff to renewable generators, which has pump-primed early adoption of solar and wind technology across the country. Already Germany obtains 15% of its electricity from renewable sources, far ahead of Britain.
But while this is a story that will warm the hearts of environmental campaigners, isn’t it all in the price? And won’t Chinese imitators rush out cheap photovoltaic cell kit that will destroy margins at European manufacturers?Stone completely disagrees. “The wind and solar industry is still very young. There is not much labour involved in producing a wind turbine. There is no competitive advantage for the Chinese.”
The Vestas story has been around for so long that I thought it was long in the tooth. But if you bought shares a year ago when they were trading at about DKr50 (£5.30), you’d be sitting on a hefty profit. In June they hit a peak of DKr93 although they have slipped back since to about DKr78. It now has a market cap approaching $20 billion (£11 billion).
Shares in Q-Cells were among the best performers on Frankfurt’s tec-Dax index last week on the back of contract news. But they are well below their peak, trading last week at €57 (£45), compared with €65 a year ago.
But renewable energy is just one theme in this fund. “I’ve got renewable, internet businesses, lots of healthcare and quite a few retail-facing companies.”
If you are detecting a smaller company bias, you’re right. Before taking over European Opportunities, a £700m fund, Stone spent seven years focusing almost exclusively on smaller company portfolios. But he says that top-down thematic and macro calls have been crucial over the past year.
Did he get it right? Mostly. “In 2007 I owned almost no western European banks in the portfolio. At Fidelity we have experts in the building on every asset class and sector, and we were very, very early to understand the subprime crisis and position the portfolio accordingly.”
But he also took an early decision to return to the sector. “In the first quarter of 2008 I began to reduce my underweight in financials. We decided that to have no banks was probably unwise.” Nonetheless, there are no banks among his major holdings, with just one financial, Allianz, appearing in his top 10. On the other side of the banks versus commodities play, Stone has an overweight position in energy, although mostly in the oil services sector. He is extremely enthusiastic about Norway’s Seadrill, which has 43 drilling units, of which 15 are under construction.
“They were very early to identify supply shortages and placed orders for dozens of drilling rigs when no-one else was doing so.” These rigs cost upwards of $500m so it was a brave decision, which is paying off. The share price has tripled since 2006, and just a fortnight ago it reported pretax profit of $218.6m in the three months to the end of June from $55.1m a year earlier. But now that the oil price is heading below $100, is it time to sell out? Stone is sanguine. “I can’t see a decline in exploration activity until the oil price is below $80,” he says.
Healthcare is nearly a tenth of the fund, with big holdings in Roche and Actelion. “The story of the healthcare sector has changed beyond recognition in the last five years. It used to be a sector in which companies benefited from regular pricing growth, regular innovation and new blockbuster drugs.
“But now you see little in the way of price increases, while changes to FDA [US Food and Drug Administration] rules mean that the rate of drug approvals has fallen. And all the time the big companies are facing stiff competition from generic rivals.”
So why is he invested in Roche? “In an industry with this sort of backdrop, it really places a premium on stock selection. Look at the challenges faced by the likes of Sanofi and Glaxo. But Roche has almost sailed through. It has been very successful at getting new approvals and its share price has consistently outperformed over the last two to three years.”
Not that its share price is that impressive. It drooped steadily through 2007, although it has rebounded strongly since the end of April.
Actelion is rather less well-known than Roche. It has only one drug, but it is profitable and like most biotechs there is a good chance that it will be acquired by one of the big pharma firms without a supply pipeline. This fund has performed consistently well since Stone took over the management. It provides a more growth-oriented alternative to the mainstream European funds, with the backing of probably the most high-rated analytical process in the industry. My only worry is the direction of the euro; it may now have hit its peak against sterling and may provide something of a headwind for Stone for the rest of 2008.