Fund Manager Q&A

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The Rules of Investing

Livewire Markets

When Al Gore’s “An Inconvenient Truth” was released 13 years ago, it brought the issue of climate change to the fore of people’s minds around the world. It might surprise you then, that the effects of greenhouse gases have been known since 1896. However, despite the huge progress made over the last decade or more, the IPCC Fifth Assessment Report released in 2018 showed that at the current rate, warming will reach 1.5 degrees by 2052. Avoiding this will require the largest globally-synchronised effort the world has ever seen.

This week’s guests on The Rules of Investing are Tom King OAM, and Simon Holmes à Court. Tom is the co-founder of Nanuk Asset Management, which is focused on investing in industries that contribute to improving global sustainability and efficiency. Simon is an energy transition specialist who founded Australia’s first community owned wind farm and is a senior adviser to the Climate and Energy College at the University of Melbourne.

In the latest podcast, we debunk some common myths about the role of solar and wind in the energy grid, discuss the investment case for sustainability, and why some people still deny the science of climate change.

Time stamps

  • 2:50 - Why do some people still deny the science of climate change?
  • 6:07 – Are there any valid arguments against climate change?
  • 8:45 – Pieces of highly compelling facts why people can’t ignore climate change
  • 11:50 – The investment case for Sustainability
  • 17:09 – Demystifying conflicting information about the role of renewables
  • 28:47 – Technologies with great investment case and impact in sustainability
  • 36:15 – Capturing carbon dioxide to increase yields on crops

Responses to our favourite questions

Each episode, I ask the guest(s) three “favourite questions”. Unfortunately, due to circumstances out of our control, we ran out of time to get our guests’ answers this week. Instead, they’ve provided their responses in writing, which I’ve laid out below.

  1. Can you share something that you’ve read recently, either a book, article, or research, that really blew you away?
  2. If you could go back in time to when you were finishing school/uni and give yourself one piece of investing advice, what would it be?
  3. If the market was going to close for the next five years starting tomorrow, and you could only own shares in one company, which would it be?

Q1 – Tom King: I recently re-read some of Buffett’s letters to shareholders, which I have always found provide an incredibly clear and useful reminder of the tenets of good long term investing and management.  “The goal of each investor should be to create a portfolio that will deliver him the highest possible look-through earnings a decade or so from now”.  As my Olympic coach used to say, “simple, not easy”.

For something more “mind blowing”, watch The Future is Faster Than You Think by Peter Diamandis.

The concepts of abundance and convergence are very real in many of the areas in which we invest, and the implications of exponential cost reductions of new technology are profound.  And check out the robots 20 minutes into this.

Q1 – Simon Holmes à Court: It's boring and geeky — unless you're an energy geek — but one of the best reports of last year was the Australian Energy Market Operator's (AEMO) Integrated System Plan. It shows that, under "business as usual" — ie. no new federal policy — almost all new investment in new generation in Australia from here on in will be renewable.

The least cost scenario has us reaching almost 50% by 2030. The model shows that the lights will stay on, and, somewhat surprisingly, only modest storage is needed before 2030. Quite significant storage is projected for the 2030s, and a large percentage will be distributed, most likely battery packs. It's going to be a fascinating next decade in energy in Australia, and globally.

Q2 – Tom King: Start early.  There is no way to catch up on compounding returns.

Q2 – Simon Holmes à Court: When looking at early stage businesses, I've learnt the hard way that great ideas are commonplace, but teams that are great at execution are rare.

It's very easy to get excited by a narrative, or a technology, but at the end of the day, so much of a business' success comes down to the people.

While angel investing is fun and can be rewarding at many levels, don't go too hard too early — there'll almost always be further investment rounds, and many new opportunities.

One rule I've always lived by in early stage investing is not to invest in anything you don't understand really well. Sounds simple, but I'm amazed by how many people don't understand the businesses they invest in.

Note: Question three is not a recommendation to buy or sell securities. This question is intended as an exercise in long-term thinking. Please consider your own personal circumstances and consult a licensed financial adviser before making any investments. 

Q3 – Tom King: Personally, I wouldn't be putting all my money into the shares of one company with no liquidity for five years.  However, I think there are some very interesting opportunities over that time frame in industries that are almost certain to grow somewhat irrespective of any global macro or geopolitical events.   Areas like enterprise cloud computing and network security, collaborative robotics and medical technology.  But as always, the investment outcomes will depend as much on price today as what happens in the future.  

The best, widely accessible, investment that I know of in Australia today is rooftop solar.  The economics vary a little state by state, but a typical good quality 5kW system can be installed for $6000-$7000 net of upfront government subsidies. A cheaper system could be as little as $3000.   Depending on your electricity consumption, such a system can easily save you $1500 or more annually.  That is a 25%+ annual return on system that will likely last for 25 years or more.   Larger systems are certainly possible, but sadly these returns can’t be scaled up significantly.  The economics are so good that it is inevitable (and right) that the current subsidy mechanisms will be reduced and before long eliminated entirely. But in the meantime, it is an investment you will find hard to beat anywhere for risk and return.

Q3 – Simon Holmes à Court: I'm intrigued by Vestas, the world's largest manufacturer of wind turbines, with 16% of the global market. Vestas has a great product and technology portfolio in a market with a high barrier of entry. While solar is a heavily commoditised market, with each generation of wind turbine the engineering challenges become more difficult and the barriers increase. While solar is now cheaper in many markets, the non-correlation of wind and solar will keep wind power relevant for the foreseeable future.

Vestas has ridden the booms and shown resilience though the busts of the renewable energy business cycle. I'm impressed by Vestas' $1bn of sales in Australia alone in 2018 and the company's confidence in now offering 30 year service contracts. It's partnership with Mitsubishi Heavy Industry to deliver 10MW off-shore wind turbines this year, with larger models in the works, is very exciting.  

Disclosure: I don't hold any shares in Vestas at this time.

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The Rules of Investing is one of Australia's top investing podcasts. We interview the leading investment minds from Australia and overseas to better understand their processes and philosophy. After launching in October 2017, there have been over...

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