Two ways to gain exposure to a trend with staying power

Recent disruptions to global energy supply following the conflict involving Iran have underscored how sensitive energy markets remain to geopolitical and logistical shocks. 

Oil and gas prices soared as the conflict forced the closure of the Strait of Hormuz, a choke point that saw 25% of the world’s seaborne oil and 20% of Liquefied Natural Gas (LNG) pass through prior to the closure. 

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Prices have fluctuated since on any hint of de-escalation and while there is a ceasefire in place, the US and Iran have yet to come to a peace agreement and the reopening of the Strait.

While negotiations are ongoing, this disruption, especially if prolonged, has serious implications globally as countries have begun considering fuel rationing and price controls. Impacts have already been felt, with Deutsche Lufthansa AG cutting short-haul summer flights due to high fuel costs. In Asia, measures to preserve energy have been implemented given that 90% of the oil and gas passing through the Strait of Hormuz is destined for the region.

Even if there is a swift end to the conflict and shipping lanes reopen, it would take months for the oil in tankers and storage to reach consumers. Additionally, the International Energy Agency (IEA) warns that it could take up to two years for output to recover to pre-conflict levels given the time it takes for output to be restarted alongside damage to oil fields, facilities and infrastructure. The IEA also warns that gas production recovery could take even longer given the damage sustained.

Against this backdrop, energy security and efficiency are becoming ever more important as countries look to better protect themselves from external shocks, bringing renewable energy back into the spotlight. At the same time, renewables are expected to meet most of the additional energy demand from AI data centres in the coming years. 

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For investors, this creates two potential opportunities in energy-related sectors. In the near term, supply constraints and geopolitical tensions may continue to support elevated energy prices. 

Simultaneously, recent events serve as a reminder of the importance of energy security and efficiency, with renewable energy and electrification being pivotal to achieving this. 

Two funds to play this trend

Using interactive investor’s new Highly Rated Funds tool, FTF ClearBridge Global Infras Inc WAcc fund could be a potential option to get exposure to both elements given its overweight positions in utilities and energy sectors. 

The fund is managed by a quartet of portfolio managers, including Nick Langley, co-founder, managing director and senior portfolio manager at ClearBridge. The portfolio managers are experienced and have a history of collaboration that has supported the strategy’s evolution with all managers having an equal vote, fostering debate and balanced decision-making.

The fund is defensive and income-focused, aiming to identify undervalued listed infrastructure assets, particularly favouring regulated assets such as electricity transmission and distribution, and gas pipelines. 

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To do this, the team rigorously scores companies on numerous criteria, most notably dividend yield, asset duration, cash flow visibility, inflation linkage and competitive pressures. Proprietary research on top candidates then digs deeper into historical and peer-relative financials, cash flow transparency, dividends and growth potential. Analysts calculate detailed internal rate of return models incorporating share price, projected dividends and terminal value. Recommendations are critiqued by the portfolio managers before selection and sizing decisions, using stress testing to manage portfolio risk. Stock weightings are determined by a stock’s internal rate of return minus the cost of equity.

The focus on income has resulted in a structural overweight to utilities, which tend to offer higher yields and are less sensitive to economic shifts. The fund’s energy holdings are all midstream companies operating pipelines which could benefit from increased throughput as higher prices can encourage production increases upstream, while in electric utilities, these can benefit from higher electricity pricing, especially if they derive revenue from lower-cost generation sources.

Also appearing in the Highly Rated Funds tool among the sustainable investment ideas is Polar Capital Smart Energy I Acc GBP. This fund stands out as a potential option to capture the energy transition as it seeks to invest in companies at the forefront of global transition towards a cleaner, more sustainable energy future. 

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The approach here focuses on quality growth companies that trade at reasonable valuations and provide solutions that enable decarbonisation through the electrification of the global energy sector. 

Companies are identified using a thematic framework consisting of four clusters: Clean Power Generation, Energy Transmission & Distribution, Energy Conversion & Storage, and Energy Efficiency. The eligible universe of 250 stocks is further narrowed down to 150 based on technology trend, regulations and policies, competitor analysis and sub-cluster attractiveness. 

Valuation screening is used in idea generation with further fundamental analysis conducted on around 80 stocks. The research is in depth, and the team are valuation conscious, balancing cheapness and growth potential.

The strategy is managed by Thiemo Lang, who joined Polar Capital from Robeco in September 2021. Lang has a technology background and more than two decades of relevant experience as an analyst and portfolio manager, and he is considered one of the most seasoned managers in the alternative energy space. Lang is joined by three dedicated resources, all of whom are former Robeco colleagues with two having worked with him on the strategy previously.

Brian Hui is an investment analyst at Morningstar.