. . . from the archives at FundAlarm
These profiles have not been updated. The information is only accurate as of the original date of publication.
September 1, 2007
FundAlarm Annex – Fund Report
The fund seeks long-term capital appreciation by investing in US and overseas of companies involved in the alternative energy or energy technology sectors, which includes companies that increase energy efficiency but excludes nuclear.
Guinness Atkinson Asset Management, headquartered in Woodland Hills CA but also has offices in London. The company was founded by a number of then and former managers for Investec, a multinational investment firm. The firm manages mutual funds whose net assets are about $340 million.
Tim Guinness, Ed Guinness and Matthew Page. Tim Guinness is the lead manager, the firm’s Chief Investment Officer and manager of the Global Energy and Global Innovators funds. Immediately prior to founding GA, he was joint chairman of Investec. Ed Guinness, Tim’s son, has engineering and management degrees from Cambridge. Before joining Guinness Atkinson, he worked on tech investing at HSBC and risk arbitrage for Tiedemann Investment Group in New York. Matthew Page has a Master’s degree in Physics from Oxford and worked briefly at Goldman Sachs before joining GA.
March 31, 2006.
$5000 for regular accounts, $2500 for regular accounts for individuals who own shares in other GA funds, $1000 for IRAs and $100 for accounts opened with an automatic investing plan.
1.7% and falling. There’s a 2% redemption fee on shares held for fewer than 30 days.
More than is usually the case, I feel like I’m on a precipice over a gaping dark chasm of ignorance. There are two questions – is there a strong case now for alternative energy investing? and if so, is there a strong case for making that investment through an open-end mutual fund? Those are good questions for which good answers would take pages. Multiple, many, numerous pages. Little of which I’m competent to write. As a result, I’ll try to offer the second-grader’s version of the story and will ask the indulgence of folks who have profound professional knowledge of the subject.
Is there a case now for alternative energy investing? Well, there’s certainly a case for alternative energy so there’s likely a parallel case for investing in the field. What’s the case?
- The world is running out of affordable oil and gas –
While there’s no question of imminent physical exhaustion, a number of economists project the future price of oil based on the notion of “peak oil.” At base, the peak oil theory says that once half of the oil in a particular reservoir is withdrawn, the price for removing the other half escalates sharply. There’s no single, definitive estimate for when a peak has been passed, since every oil field has its own life cycle. In general, though, experts seem to agree that the US peaked in the early 1970s and the North Sea peaked in the early 2000s. The most pessimistic estimates claim that global production is has already passed its peak (this is a subject, by the way, that causes Saudi oil ministers to sputter mightily), with 54 of the world’s 65 major producing nations in decline. A more cautious study commissioned by the US Department of Energy (Hirsch, et al, Peaking Of World Oil Production: Impacts, Mitigation, & Risk Management, 2005) predicted the peak would be “soon,” by which they meant within 20 years. Natural gas is not substantially better off.
That study made two other important claims: (1) “As peaking is approached, liquid fuel prices and price volatility will increase dramatically, and, without timely mitigation, the economic, social, and political costs will be unprecedented.” And (2) “Viable mitigation options exist on both the supply and demand sides, but to have substantial impact, they must be initiated more than a decade in advance of peaking.”
A point rarely recognized is that much of the oil that remains is not light sweet crude; it’s generally a heavy, sour oil that’s hard to refine and a relatively poor source of higher distillates such as gasoline.
- Fossil fuel consumption is irreparably affecting the global climate
You don’t actually need to believe this argument, you mostly need to agree that it is moving into the area of “commonly accepted wisdom,” since that’s what motivates governments and other organizations to act.
I’ll note, in passing, that I’m not a climatologist and so I’m not competent to judge the technical merit of what appears to be an enormous and growing body of peer-reviewed research which substantiates this claim. I am, as it turns out, trained to assess arguments. From that perspective, I’m note that those arguing against the theory of human-induced climate change generally support their case through deceptive and misleading arguments – they mischaracterize their sources, suppress inconvenient conclusions found in the research they cite, over-claim their own qualifications, and shift argument grounds midway through. The vast majority of the skeptics’ discourse appears in blogs rather than in peer-reviewed journals and little of it is research per se but rather they focus on often-narrow methodological critiques (one recent controversial was over a quarter-degree difference in a calculation). With the possibility that the future of human civilization hangs in the balance, we deserve much more honest debate.
- In anticipation of the two preceding arguments, governments are going to push hard for alternatives to fossil fuels
Whether through taxation, carbon emission caps, subsidies or legal protections (e.g., relaxed siting requirements), governments around the world are moving to support the production of alternative energy.
The tricky question is the “now” part – is it currently prudent to invest in this field? The Guinness Atkinson folks are refreshingly blunt, both in print and on the phone, about the undeniable risks in the field:
. . . a large percentage of alternative energy companies are thinly traded small cap stocks . . . many of these companies are loss making or just beginning to produce profits [and] many alternative energy stocks have appreciated significantly recently as a result of increased energy prices (Guinness Atkinson, The Alternative Energy Revolution, March 2006).
In a phone conversation, Jim Atkinson (GA’s president) stressed that these were voluntary caveats that GA included because they wanted well-informed investors who were willing to hold on through inevitable, short-term dislocations. The company does, indeed, support the goal of informed investors. Their monthly Alternative Energy Briefs provides a richness of information that I’ve rarely seen from a fund company.
Three factors specific to Guinness Atkinson cut against these concerns: (1) the elder Mr. Guinness has a lot of experience in the field of energy investing. The Alternative Energy fund is the offspring of a successful, offshore global energy fund of his. Both of the younger fund managers have graduate training in technical fields (engineering and physics) which bears on their ability to read and assess information about firms and their technologies. And (2) they’re reasonable conservative in their choice of companies. By Mr. Guinness’ calculation, about 82% of the portfolio companies have “positive earnings forecasts for 2007.” That number climbs to 90% by 2008. Finally (3) they build risk management into portfolio construction. They expect to have 30 or so stocks in the portfolio and, in a perfect world, they’d assign 1/30th of their assets to each stock. Lacking perfect confidence in all of their companies, they assign a full share only to companies in which they have the greatest confidence, a half share to those in which they have fair confidence and a “research share” – that is, a very small amount – to those whose prospects are most speculative but which they’d like to track. The managers note that their poorest performers are generally held in the “research” pool, which both vindicates their stock assessment and limits the damage.
Is there a strong case for making that investment through an open-end mutual fund? I’m rather more confident that the answer here is, yes. The alternative channel for alternative energy investing is one of about three exchange traded funds:
- PowerShares WilderHill Clean Energy
(PBW) which invests in clean energy and conservation technologies. Its top holding is Echelon Corporation which provides “control networking technology for automation systems.” Echelon’s website highlights their work in improving McDonald’s kitchens. Net assets are $1.1 billion with expenses of 0.70%.
- Market Vectors Global Alternatives
(GEX) which tracks the Ardour Global Index (Extra Liquid) of companies “engaged in the business of alternative energy.” Net assets are $61 million, expense ratio is not available.
- First Trust NASDAQ Clean Edge US Liquid
(QCLN) tracks the NASDAQ Clean Edge U.S. Index of “clean energy” companies, which includes lots of semiconductor makers. The fund has $23 million in assets.
There are several “clean technology” ETFs, which invest in pollution control, networking, and efficiency-supporting companies. There are, in addition, a number of specialized “green” mutual funds (Spectra Green) and ETFs (Claymore/LGA Green) which don’t particularly focus on the energy sector. They like, for example, Starbuck’s because of its commitment to recycling and environmental causes.
So why not an ETF? At base, the only argument for them is low-cost: their expense ratios are about 0.7% and Guinness’ is about 1.7%. That cost advantage is overstated by three factors: (1) Guinness e.r. is declining, their’s isn’t. (2) Brokerage fees aren’t included – each purchase of an ETF goes through a broker for whose services you pay. And (3) ETFs don’t trade at their net asset value. When ETFs trade at a premium, you actually pay for less than you get. Premiums on the alternative energy ETFs have run lately from 33 to 260 basis points. By way of translation, a fund with a 70 basis point expense ratio and a 260 basis point premium to NAV is costing an investor 3.3% to buy.
The arguments against the ETFs are (1) that they’re limited to liquid investments. That’s why you’ll notice the “liquid” in the names of several. That generally excludes them from investing in private placements or very small companies. (2) You have to have a lot of confidence in the quality of the underlying index. A number of commentators don’t. Of PowerShares WilderHill Clean Energy, which has more assets than all of the other investment options combined, Morningstar recently opined:
. . . this fund lacks a well-reasoned strategy as well as a sensible, diversified benchmark. Instead, its index holds lots of companies with unproven business models and speculative stock prices. For example, the index’s average return on equity is actually negative, despite its rich average price/earnings multiple of 25 (Analyst Report, 3/5/07).
They concluded that investors “would be better off with an active manager,” though that was not a particular endorsement of Guinness Atkinson. In addition, (3) ETFs can be sold short and otherwise made part of the arbitrage games of hedge fund managers. Which isn’t a recipe for stable returns.
Perhaps as a result, Guinness Atkinson has consistently outperformed the ETFs. It benchmarks its performance against the WilderHill Clean Energy index. Here are the performance comparisons, as of 7/30/07:
|Trailing twelve months
|Since fund inception
If I were to invest in alternative energy, I think there’s a strong case to be made for investing with an active manager who has broad discretion and considerable experience. The ETF’s cost advantages are simply not sufficient to overcome their design limitations. Even if Guinness did not have a corner on the market for no-load alternative energy funds, their excellent work in a range of other funds, thoughtful portfolio construction and broad expertise makes them a strong candidate for the role.
(By way of full disclosure, my wife – who has degrees in environmental planning and law – reviewed a bunch of the literature I’ve been working through and chose to invest several thousand dollars of her retirement account in the Guinness Atkinson fund.)
http://www.gafunds.com/gaaex.asp. You’ll find links to the monthly Alternative Energy Briefs there.
For those interested in the peak oil theory, the DOE-commissioned study is available at http://www.netl.doe.gov/publications/others/pdf/Oil_Peaking_NETL.pdf.