The Experienced Energy Transition Investor

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    As investor appetite for sustainable opportunities continues to rise, the market is tightening, and finding attractive valuations can prove to be difficult. While some investors crowd around the most prominent opportunities, more experienced asset managers seek to find the lesser-known, undervalued investments.

    We caught up with Ken Geren, portfolio manager of UBS O’Connor’s Environmental Focus Strategy (EFF) to discuss the advantages of a long-short investment approach to capitalising on the energy transition and the opportunities it presents.

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    Poised to Benefit from an Inflection in CapEx

    The strategy launched in June 2020 and according to Geren, the timing was right. “Due to an increased sense of urgency to address climate change, through policy and corporate action, the energy transition has really started to accelerate and is occurring much quicker than we thought.”

    “Despite its recent launch, the origin of the strategy can be traced back several years,” says Geren. “Kevin Russell, CIO of O’Connor, and I talked about starting a fund like this in the middle of last year when we realised we were seeing an inflection in many sectors, including in renewable energy.”

    “Everything is coming together now to drive investments into renewable energy, which will drastically change the energy supply mix going forward,” he says. “We are witnessing a multi-decade wave in capital expenditure to change the emissions profile of the energy sector. From a catalytic point of view, the impact of this shift on the investment world may be a once in a generation phenomenon.”

    Expertise to Navigate the Market

    “We also realised that the factors that go into the climate transition are represented in multiple sectors where we have deep experience. We believe that our strong team puts us at a considerable advantage. We do not have to wait for themes to fully develop or to find a team of experts. We are poised to take advantage of this historic shift,” Geren says.

    “Our team includes six analysts. Five of them focus on specific sectors and one specialised on sustainability and research, including policy, broad thematics and climate solutions. Our primary sectors of focus are industrials, materials, utilities, renewables, oil and gas, transportation and agriculture.”

    The team’s dedicated expertise is necessary to navigate the vast range of investment opportunities and to make sense of large amounts of information, according to Geren. “Our job is to identify the right solutions and quantify the impact that they’ll have on companies, both positively and negatively. On average, our analysts have over a decade of experience with the companies in their universe. We are able to apply our skillset to sectors that we think will have amplified responses to the climate paradigm shift.”

    The EFF’s Pick and Shovel Approach

    The team looks for investments globally but currently spends most time on opportunities in the US. “We follow a thematic investment process. We focus on the themes that we believe will dominate the future, such as electrification of power and transport, agricultural technologies, and stranded assets. Our job is to identify the companies that fit into these themes and find the winners and the losers.”

    “Some strategies take a climate-based approach based on trading long renewable energy companies and short fossil fuel companies,” he explains. “We take a pick-and-shovel approach to finding where the capex is being directed. Some of the better opportunities in my opinion are less obvious. The market tends to flock to the most salient winners of climate change. However, we are comfortable following the less obvious pathways if we find that the market favourites are overvalued. Often, many of these companies trade at traditional multiples, even though they are now offering a longer path of earnings growth.

    “The ongoing inflection in capital expenditure will likely tighten many supply chains, which will be beneficial for many sectors and companies. Policy and corporate action may also be disruptive to certain sectors, whose assets will become structurally impaired by the energy transition. Because we employ a long/short strategy, we have the ability to take advantage of both winners and losers,” Geren concludes.

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