Wind of change for climate funds

Big fund groups such as Schroders have recognised a mega-trend in companies set up to fight the effects of global warming. But investment in them may suit only the more adventurous.

Are climate change funds about to go mainstream? They have been around for more than two years now, but have barely registered on the radar of most financial advisers. That, like the climate itself, could be about to change.

Schroders was among the first to bring a climate change fund to market, with a Luxembourg-based fund in June 2007 followed soon after by an onshore version.

The fact that a hard-nosed institution such as Schroders was willing to back the concept is itself evidence that this is a serious arena for investing.

Schroders gave the co-managers, Simon Webber and Matthew Franklin, six months to explore the opportunities and appointed two further analysts to help in research.

From this was born the Global Climate Change fund. Since launch it has fallen by about 10%, but that is by most measures a decent result given the extraordinary market conditions. And since the start of the year, it has been a flyer. Year to date it is up 16.2%, compared with the average rise of 9.8% for global growth funds.

The fund invests in stocks that the managers reckon will benefit from efforts to accommodate or limit the impact of climate change.

Many advisers will be switching off at this point. Scepticism about the extent of climate change is still evident – only this week the mayor of Doncaster called the whole thing a “scam” – but that’s not the point. The point is that whichever way you feel about it – and I’m a convert to the cause – huge sums of money are now committed to tackling climate change. As a mega-trend in markets, it cannot be ignored.

Britain is committed to spending £100 billion on renewable energy by 2020. South Korea has a five-year $84.5 billion (£52 billion) programme to build ­industries such as smart grids, hybrids and LEDs (light-­emitting diodes).

The G8 summit in Italy agreed a target for an 80% ­reduction in global emissions by 2050, and later this year the Copenhagen summit will set out the roadmap to achieving this. It will not be possible without a massive economic transformation.

Webber says: “Climate change is not going to go away. It will require us to move to a low-carbon economy and will affect sectors such as transport, agriculture, retailing and infrastructure. It touches almost everything in our lives.”

But how do you construct a portfolio from such fine words? What makes a “climate change” stock? Is it all technology start-ups?

Certainly not, says Webber. When the Global Climate Change fund started, he estimated that there were 500 investable stocks in his universe. Today there are 700.

And they are not just solar and wind power stocks. ­“Climate change investing is not all about solar,” says Webber. “We will be changing our energy systems towards nuclear, wind and solar. It’s hard to dispute trend. I refute the case that this is a theme that is already played out. We have a universe of more than 700 stocks involving multiple industries with a very powerful growth story.”

Webber holds 50-80 stocks, diversified by geo­graphy and sector. “This is not a concentrated or high volatility fund, and it’s not a tech fund. It includes a lot of industrials and utilities and stocks that you wouldn’t at first associate with ­climate change, such as video conferencing companies.”

He points to Tandberg in Norway and Polycom in America, two companies that dominate in video-conferencing. Both have increased ­revenues throughout the credit crunch. Tandberg’s shares have doubled from a low of $9.25 last November to more than $20 in recent weeks. Meanwhile, Polycom has gone from $14 to $25, although it is still a long way from its peak.

Video-conferencing is a boon to the banks, says Webber. “Using video ­conferencing, banks can cut costs and cut emissions at the same time.”

Honda is the fund’s largest holding, followed by Gamesa, a Spanish windpower equipment maker. Webber also holds energy stocks such as BG and Energy Resources of Australia.

Gamesa has a long way to come back to the highs it enjoyed as recently as August last year. It is trading at about €15 (£13), up from a low of €8 but far below its €35 peak. Vestas, perhaps the best known wind power stock – which is not in Webber’s portfolio – is also about 50% off its peak.

But will all the spending on solar and wind power really translate into profits for fund investors? Webber’s answer is that this is exactly why investors need a professional manager watching how these fast-evolving industries are faring. “Last year we had no solar in the fund – we could see stocks were overpriced and the over-capacity coming along.”

But there is no getting away from the fact that Global ­Climate Change is an out-and-out growth fund, more suited to the adventurous investor.

Take a look at the HSBC Climate Change Benchmark Index. It shows that, on average, since 2004 companies in the index have given investors a 48% return (in dollar terms). But that conceals a rollercoaster ride. The index started at 100 in January 2004, soared to 235 in July 2007, then marched back down to 100.69 in March. Since then it has leapt ahead again and this week stood at 148.23. The conclusion to be drawn is that any investor in this category of funds should be holding for the long term only.

But advisers now have a wide range of funds to choose from. Schroders were soon joined by HSBC, while F&C and Henderson both have similar funds. Then there is the new fund from WHEB and another new launch this autumn from Tiburon Partners, a hedge fund operator.

The sector is maturing fast. More and more funds will be launched to satisfy an appetite for mega-trend investing, not just among retail but also among institutional clients. Where Schroders have the edge is that being among the first to market they will also be the first to be able, next year, to start trumpeting a solid three-year record.