Why Charlie Munger might be drawn to these four industries

Investing would be easy if you had a clear view of where the world would be in the future. Imagine a crystal ball showing you the industries that would flourish and those that would flounder. Whilst perfect foresight is impossible, there are some time-tested patterns that can serve as a beacon for investors.

One such example is the power of incentives. As Charlie Munger famously quipped, “show me the incentive, I’ll show you the outcome.” For James Tsinidis, Portfolio Manager of the Munro Climate Change Leaders Fund, following the incentive underlines the thesis behind their high-conviction views on the opportunity in decarbonisation.

Tsinidis explains that there are three primary incentives pulling capital into industries tackling climate related issues. One of those is government programmes such as the Inflation Reduction Act in the US, where US$500 billion of spending and tax breaks will be directed at clean energy and healthcare. That’s a huge amount of capital that will take decades to be deployed.

“Regardless of whether you believe in global warming or not, reality is this money is going to start to get spent,” Tsinidis says.

In the following interview, Tsinidis dives further into the incentives that are pulling vast amounts of capital towards industries addressing decarbonisation. He also provides examples of the global stocks that he is backing to be future leaders. 

Please note: This interview took place on 26 April 2023.

Edited Transcript

So obviously it's a big problem, decarbonisation, and obviously getting to that 1.5 degree goal. We're obviously tracking above that at the moment per the scientists. Regardless of whether you believe in global warming or not, reality is this money is going to start to get spent. The reason it's going to start to get spent is because there's three big tailwinds for growth.

The incentives 

There's the government programmes, the US, for example, has this Inflation Reduction Act. It massively promotes green transition, energy transition and so forth in the US. So there's massive programmes there behind that. 

The second piece is obviously the corporates are doing it. So the corporates are all signing up to net-zero. So every company out there is going to be under pressure to do this. Munro Partners has done this. That means basically moving into a 6-star energy building, it means offsetting emissions from travel, whatever it might be. From small companies like ours, right up to BHP and so forth. So every company's going to do it. 

So it means there's a revenue opportunity for the facilitators of that, basically that energy transition. So that's point two. 

The third point is just what's happening on the investor side and with capital. So a lot of investors are obviously signing up to net-zero ambitions as well. There's a lot of ESG money out there and that just promotes basically pressure back onto the corporates to basically spend this money. So that's why we're very much convinced that this is a very large opportunity and it's going to be an opportunity for multiple decades, not just this decade.

Multiple winners (they just need to be big) 

So if you do believe the analogy that this is the tech opportunity of 20 years ago, obviously there's going to be Googles and Facebooks and Amazons and so forth out there, but there's going to be a long list of those that didn't make it. This one's a slightly different opportunity, we think. It's more of a physical opportunity, and so there'll probably be more winners because not everyone can physically do everything.

So if you look at the one big winner that's probably the number one winner or guaranteed number one winner today in, say, the transport side, it's obviously Tesla. And so they can't build every car out there. It doesn't appear likely that that's going to be the case. Maybe one day in multiple decades, maybe everybody has a Tesla, and maybe I've just misspoken there, but reality is, there's probably going to be multiple brands of cars, even if you look at Chinese cars, et cetera. 

So it's unlikely there's going to be this winner-take-all market in climate. 

And that's just a simple example. If you're talking about clean energy, again, not every developer out there is going to be able to develop every project. There's going to be multiple companies. If you think about them as green energy majors, the same way today, Exxon's not the only oil company out there, for example, there's multiple oil companies out there. So we'd expect a similar situation to occur there in the energy transition and the clean energy side of things.

And we've already started to see that over the last 10, 20 years. If you take the wind industry, for example, there's a dozen wind companies that built the turbines and built the towers and so forth. And today, there's probably only three, maybe four in the Western world. The others have all gone out of business. Ultimately, over time, the turbines have got bigger, the complexity of these projects has got bigger or larger as well, and they've had to be global as well. So it's created a whole bunch of different problems for the industry. And now you're at the stage where you're pretty much left with three, maybe four players in the Western world. China's slightly different situation, but globally that's the case. So you already have started to see that, and that's just one example I'd speak to there. 

Four industries attracting new investment 

Energy efficiency, we really like a company called Kingspan (LSE: KGP), it makes insulation boards and panels. It's basically a lot more effective to build with their products from a heating and cooling perspective versus concrete. So it's just a very long s-curve opportunity for them as their insulation takes share from the alternatives, which is just basically concrete and steel. So that's one example there that we've owned for a very, very long time, off and on, probably for 15 years as a firm at Munro and then prior as well. 

Clean energy, I'd probably point to a company called Quanta (NYSE: PWR). So if you think about the grid, particularly in the US I'm talking about here, it's very old and there's going to be a lot more pressure put on the grid. Think about the EV situation, what pressure that's going to put on as you take power source away from oil and put onto the grid as you're charging your car each night. 

So the grid needs to be modernised, a company like Quanta is basically an engineering and construction company behind that that's going to do a lot of that work. So that's a good stock that we like as well. 

On the circular economy side, we really like the waste management space. Waste management is a pretty old school sector, you get paid good money to go drive a truck around, pick up trash, and then put it in a landfill. And it has grown consistently for a very, very long period of time because basically we're wasting more and more. But what we're finding lately with all these companies is there's a whole bunch of different growth avenues coming off the back of this. So recycling's the obvious one, something that they haven't done well in the US forever basically, and now they're starting to invest more in recycling, and actually getting value back for basically their trash and basically selling it back to the customers. 

The other interesting space we like within the waste space is the renewable natural gas opportunity as well. So if you think about what goes into your bins at home, we've obviously got the green bins here in Australia, or in Melbourne, they're green. But basically that's where your food scraps go and other organic material. 

These waste management companies are now actually starting to tap their landfills for the gas that comes off this, and they then sell that gas back into the grid or power their trucks with it. And it's actually a very, very large opportunity. 

It doesn't sound like a large opportunity, but relative to their EBITDA, it could be quite material. And that's a new opportunity that basically the market hasn't picked up on yet. 

The last piece is the clean transport side. It's probably hard to go past the main winner there that we like long term, which is, again, Tesla (NASDAQ: TSLA) . They're so far out ahead of the competition, they actually make a 20% or so gross margin off their autos that they sell, which is quite impressive relative to the industry. But as I say, they are cutting price. So they're basically short-term impacting their own profitability for long-term gain, i.e., to hold their market share or even increase their market share, but also to promote the growth of the EV industry.

So long term, it's very hard to go past Tesla, short term, obviously their earnings will come under a bit of pressure from what they're doing, but long term, it's hard to look past them.

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