What’s the fund?

This month we are taking a closer look at the Nanuk New World Fund. Nanuk is one of the only Australian fund managers dedicated solely to identifying investment opportunities and risk associated with environmental sustainability and resource use.

Nanuk Investment Management was established in 2009 The investment team have extensive experience across global equity markets and is led by Tom King OAM, who is an engineer by trade and spent several years working as an investment adviser to the Packer family. Paul Chadwick, who was most recently head of Global Macro strategies at GMP Australia. Paul is supported by Tim Ryan, who founded Orion Asset Management and has over 36 years’ experience, as well as Eric Siegloff, who was deputy CIO of ING’s European multi-asset investment management division. Nanuk has offices in Sydney, London and New York and offers three wholesale funds to investors seeking sustainable, environmentally focused investment strategies.

Why Nanuk?

Nanuk is one of the only Australian fund managers dedicated solely to identifying investment opportunities and risks associated with environmental sustainability and resource use. The team is dedicated to becoming world leaders in the space and is one of just a few groups globally who have the experience and capability to deliver returns and meet their self-directed mandate. The investment process is focused around remaining active and aware of the changing nature of the environment and the impact that businesses can have on it, with a fundamental value driven approach to identifying investment opportunities. Nanuk believes that resource constraints and environmental challenges like climate change, pollution and water scarcity necessitate significant changes to business practices globally and that these changes will present significant long-term investment opportunities and risks.

Where does it fit in your portfolio?

The fund meets the requirements of the Thematic Bucket as its sole purpose is to invest in listed companies around the world that are associated with the broad theme of environmental sustainability. More specifically, they seek to invest in companies involved with clean energy, energy efficiency, industrial and manufacturing efficiency, waste management, pollution control, food and agriculture, advanced and sustainable materials, water, healthcare and technology. There is growing expectation that businesses in both the developed and developing world will commit to having a more positive impact on the environment and community they work within and Nanuk is a first-mover in this sector.

Why invest?

The New World Fund is one of the only truly global managers in Australian that focus solely on investing into sustainable, environmentally and ethically aware businesses. Recent performance has shown that it is those companies focused on investing sustainably that generate the greatest returns over the long term. Whilst the team is small, they leverage off extensive relationships and broker networks to obtain research and insights into the investment universe. The fund applies both negative and positive screens to the identification of its investment universe which includes around 1,600 ‘sin stocks’ that are involved in oil, gas, coal and similar industries. The fund will invest into around 60-70 stocks at any given time which are selected using a fundamental approach based on a combination of basic valuations with a macro/thematic overlay which considers the growth opportunities in the various sectors. The fund has grown to $200m under management and continues to attract additional capital from both institutions and retail investors as the importance and value of new technologies and energy efficiency seemingly grows by the day. The fund is long-only, it cannot short companies, which means it will be volatile and an investment term of at least five years will be required. The fund offers daily liquidity, charges a management fee of 1.2% and is only available to wholesale investors.

What does it invest in?

 We have provided more detailed information in the section that follows, but summarise the current allocation of the fund as follows:

 

How has it performed?

The short-term performance has been exceptional, with the fund delivering 28.8% for the 9 months to 30 September 2019. This exceeded both the MSCI World Index, 21.3% and the FTSE Environmental Index, +24.8%. Longer term returns are also strong, with the fund averaging a return of 17.6% per annum over the last three years and 14.6% since inception, both ahead of all benchmarks. The strategy has benefitted from the increasing efficiencies available to businesses investing into more sustainable technologies and the increasing direction of capital towards these companies in the face of global climate action.

We were lucky enough to be joined by the Chief Investment Officer, or Portfolio Manager of the Nanuk New World Fund, Mr Tom King, at our latest client round table. Rather than focus on the funds recent performance, which has been exceptional, Tom put forward his views on the outlook for both the global economy and the sustainability revolution that is the core of his investment approach.

The presentation began with Tom drawing attention to the likes of Apple, who had reported overnight, and the fact that the first smart phone was created just 12 years ago. He noted very few, if any people, could predict how important and ubiquitous the smart phone would become in our daily lives. It was this underestimation of the acceptance of new technologies that Nanuk is seeking to identify but in relation to the sustainability of our very way of life.

The presentation opened with a fairly straightforward summary of those areas where the sustainability revolution was likely to impact the economy the most:

  • The transition to clean energy;
  • Improving industrial efficiency;
  • The production of food;
  • Healthcare technology and treatment;
  • Energy efficiency;
  • The use of scarce water resources;
  • Recycling of waste and pollution control; and
  • Advanced and more sustainable materials.

Without going into extensive detail, rather we direct you to the slides available https://sponge-capybera-dlkm.squarespace.com/s/SEMINAR-Second-Wave-Oct-2019.pdf, we highlight a number of particularly pertinent points that were made during the presentation.

  • At a time when many are suggesting the oil sector is heading for a renaissance and that the adoption of electric vehicles (EV) was overstated, Tom explained Daimler’s recent decision to stop development of all internal combustion engines. Tom suggested that by the mid 2020’s there will be more EV than internal combustion cars on the roads around the world.
  • Whilst explaining the evolving cost curve of energy production in Australia and around the world, he highlighted that under nearly all conditions, nuclear power is and will remain too expensive to power our economy. In fact, most renewable energies were actually cheaper than running existing coal and gas fired stations, as shown in the table below. This included the cost of the associated battery storage required to support renewable sources.

The questions naturally moved towards the value of pumped hydro power, like Snowy 2.0, however, it was clear from the discussion that firstly, it is an expensive way to produce power with large amounts of loss, and secondly, there were very few unused sites available to build similar projects.

The discussion moved towards the importance of action being taken on CO2 emissions, with some interesting facts including that the global herd of cattle emits as much greenhouse gas pollution each year than the US as a country. More importantly though, he estimated that the time taken from the point of adoption of pollution targets to the point of no return for technology, has been around 10-20 years in history.

A table discussion began around why Australia had not been successful in establishing our own manufacturing facilities for the production of batteries at a global scale, with many believing we should be getting started now. Tom put it down to the lack of an integrated vertical supply chain compared to the likes of China and the comparatively expensive cost of labor and energy which are the two key inputs.

Tom provided some analysis around the history of technology improvements and highlighted that the forecasts of the production cost reduction of most technology, including renewables, was excessively conservative. For instance, forecast cost reductions for lithium batteries in 2030 were actually hit in 2017, 13 years ahead of schedule. Solar was subjective to a similarly conservative expectation of adoption:

In moving towards his darker outlook for the future, he outlined the key contributors to greenhouse gas emissions from the UN, which were as follows:

Tom noted that these technologies generally formed part of the first wave of sustainability and were the so-called low hanging fruit, like solar energy and electric vehicle adoption. He outlined his 8 themes of the second wave as follows:

  • Electricity – transition to renewables and storage;
  • Electrification of transport
  • Fossil fuel to electricity by hydrogen capture and feedstock changes
  • Production changes in agricultural, diet changes and waste reduction
  • Improving the energy efficiency of buildings
  • Improving waste reduction and recycling
  • Many small changes to water efficiency.

 

  • The likely winners of these many transitions were:
  • Solar, wind and energy storage
  • Smart energy grid technologies based around demand response
  • Electrification of heat
  • Hydrogen (power to gas)
  • Sustainable materials
  • Recycling
  • Controlled environmental agriculture
  • Plant based protein
  • Waste management and processing
  • Electric vehicles including buses
  • Rail transport
  • Big data and AI
  • Advanced manufacturing

 

  • And the likely losers:
  • Fossil fuels including oil, coal and natural gas
  • Centralized electricity grids
  • Petrochemicals and plastics
  • Traditional ‘Portland’ cement
  • Blast furnace steel production
  • Air transport
  • Crop based biofuels
  • Agricultural chemicals
  • Beef/lamb

Tom brought the discussion back towards his conclusion, that the sustainability revolution was inevitable. He noted that the election result in Australia was not based on climate policy, but various other matters and highlighted that some 85% of Labor voters wanted action on climate change but just 16% of Coalition voters. Looking more closely, the trend is being driven by millennials and young people, meaning every election will see more voting for action. Tom suggested that the approach taken by the French Government in recent trade negotiations, effectively forcing their trade partners to undertake similar action on the climate if they wish to benefit from the French economy.

Finally, the presentation was concluded through a discussion of many of the underlying investments but with an important precursor. This was that the Nanuk fund was not established to bet on unknown technologies with shareholder capital but to back proven technologies as they become ubiquitous in our lives. He noted that solar panel shares are on average down 90% over the last 10 years, even as solar panel installation has reached mass levels.

As we have highlighted on several occasions, the Nanuk strategy is an example of how businesses around the world get on with the task of tackling major issues, solely because it is in their best interest.