This 2nd Week of September 2021 Thoughts
But today’s investors have been convinced by market professionals to focus not on risk but relative performance; not on strategy but fees; not on fit but trends. Venkatesh Reddy, Chief Investment Officer of Zeo Capital Advisors
This week’s Barrons was full of great pieces on why renewable energy is on the rise and featured one of our funds. It might be a surprise to you that not all socially responsible mutual funds are free of traditional fossil-fuel companies, but the Pax High Yield Bond is living up to its ESG mandate when it comes to energy. Portfolio manager Peter Schwab has completely weaned the $647 million fund off fossil fuels—making it the only active high-yield mutual bond fund without traditional energy holdings. He believes the sector is too risky from both an environmental and investment standpoint and expects renewable energy to continue to take away market share from traditional energy.
This fund, owned by most clients, shows that ESG funds can keep up with the pack: Pax High Yield Bond ranks in the top 27% of its high-yield bond category on a five-year basis and in the top 30% on a three-year basis. “The idea is to try to identify businesses that we think are going to be more durable and, frankly, are in a good position to capitalize on a lot of these changes,” he says. To those who would say ESG funds under-perform because they shun certain sectors, Schwab points out that positive credit selection delivers the bulk of his fund’s performance, rather than sector selection.
To compensate for no longer having exposure to traditional energy, Schwab looks to sectors correlated somewhat to energy, such as industrials and building materials. Water infrastructure is an example of a substitute for traditional energy holdings and Schwab sees a strong need for municipalities and commercial entities to improve water infrastructure for both fresh water supply and sewer applications, and increasingly for storm-water runoff management.
Attached are pieces on two bond funds that will be mainstays going forward: Pax High Yield and Zeo Low Duration High Yield.
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Despite a shortage of semiconductors: electric-vehicle (EV) sales topped three million in 2020, a 40 %increase over 2019. More people than ever are buying EVs as governments offer incentives to accelerate EV ownership, emission regulations become more stringent, and consumer interest in sustainability increases. McKinsey recently surveyed consumers in the U.S. and abroad: 50% of respondents said they are seriously considering buying an EV or hybrid vehicle. Millions of EVs are expected to hit the road over the next decade will change auto maintenance, power-train manufacturing, and public infrastructure.
😲 Why does this matter to you? This will totally change what cars cost to buy and maintain. Think of the fast-charging stations and on-site charging infrastructure: we will need more than 55 million chargers by 2030. Think carefully before you buy another traditional gasoline powered car: if you can push it forward a few years, the technology could improve enough that an EV could have the range we need to replace our current gasoline engines.
The United Nations’ Intergovernmental Panel on Climate Change, IPCC, reportes the extreme weather and ensuing chaos we are now seeing will continue to worsen. In light of this, it is staggering that the global banking sector continues to fund fossil fuel projects. In the five years since the Paris Agreement, our 60 biggest banks have increased their investment in coal, oil, and gas to nearly $4 trillion, compared to $203 billion in bonds and loans going to renewable energy projects. There has been sincere and impressive efforts, including some major banks and insurers, to de-carbonize, as a growing number of investors are demanding greater transparency over their exposure to climate risk. This IPCC report isn’t without hope: deep cuts in greenhouse-gas emissions could still stabilize rising temperatures, but it will take governments, industry, and society to change this future: shifting finance won’t be easy. Big banks don’t need fossil fuels: these investments carry numerous risks, from reputational damage to legal exposure and to seeing reserves stranded underground. Renewables offer a more attractive return and CEO activism, combined with responsible business leaders, can make greater demands on short-term thinking.
😲 Why does this matter to you? The tide is changing and you, and your investments, are in good company. New targets to reduce direct emissions (known as “scope 1 and 2” emissions), and indirect emissions (scope 3) are more common. Today, much of my portfolio analysis work is centered on ensuring that you own fossil fuel free portfolios. The future is in renewable energy, and you are there!