David Stevenson: Clean energy attractive, but valuations scary


The real stars of the last year haven’t been GameStop chancers, or tech mavens but clean energy fund managers.

As my colleague Jeremy Gordon pointed out in an article last week, BNP’s Energy Transition fund produced a 179% return, while Guinness and its Sustainable Energy fund is up a ‘mere’ 78% during 2020. The Schroder ISF Global Energy Transition fund, which I have written about in this column is up 90.2%.

Astonishingly, the big ETF in this space, the iShares Global Clean Energy (INRG) exchange-traded fund (ETF) chalked up a 134.8% rise.

Dig around inside many of these clean energy funds and one discovers a host of hydrogen-related stocks. The BNP fund invested in Plug Power for instance, a US hydrogen fuel cell company whose shares are up more than 16 times over 12 months.

This might be a propitious (or otherwise, depending on how cynical you are) time for LGIM to launch its very own dedicated Hydrogen ETF. It is called the L&G Hydrogen Economy ETF and has a ticker of either HTWO (dollar) or HTWG (sterling) and a TER of 0.49%.

As a fund this is consistent with the firm’s approach in being more active in the the way that they construct indices, using an approach which focuses thematic exposure on a smaller subset of stocks using industry experts, this time at Solactive, to help identify the index constituents.

In this new index the companies are categorised and selected based on their role in the global hydrogen economy, using the following criteria:

-Hydrogen producers and electrolyser technologies (Nel Asa, ITM Power, McPhy Energy)

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-Fuel cell manufacturers (Plug Power, Ceres Power, Ballard Power Systems)

-Integrated supply-chain players (Linde Plc, Air Liquide SA, Johnson Matthey)

-Fuel cell components (The Chemours Company, Kolon Industries)

-Heavy mobility providers (Daimler, Toyota, Weichai Power)

You will notice from the table below that currently, one stock Fuel Cell Energy, has a weight of greater than 20%. That is largely because the stock price increased strongly since the latest index rebalancing in November – and my guess is that you’ll see a big rebalancing in the next few weeks.

Security Name Security RIC Index Weighting
FUELCELL ENERGY INC. FCEL.OQ 22.74%
PLUG POWER INC PLUG.OQ 6.96%
BLOOM ENERGY CORP BE.N 5.56%
BALLARD POWER SYSTEMS INC BLDP.OQ 5.10%
ITM POWER PLC ITM.L 4.61%
CERES POWER HOLDINGS PLC CWR.L 3.70%
NEL ASA NEL.OL 3.53%
POWERCELL SWEDEN AB PCELL.ST 3.19%
HEXAGON COMPOSITES ASA HEX.OL 2.91%
KOLON INDUSTRIES INC ORD 120110.KS 2.84%
DOOSAN FUEL CELL CO LTD 336260.KS

2.78%

Source: LGIM 

Now, its easy to be cynical about momentum driven thematic funds with a very tight focus. Clearly these kinds of funds are much closer to active stock picking than traditional passive funds. And clearly the hydrogen cycle might have got ahead of itself – probably my gut feeling.

But we collectively underestimate the way in which momentum driven markets can keep pushing narrow ideas endlessly higher. I thought Tesla for instance was crazily overpriced many moons ago but if you’d have been on the short end of that trade, you’d be a very poor investor by now. 

The core bull argument for hydrogen is that we are only at the beginning of a huge structural transformation which requires us to have hydrogen powered lorries, home boilers and industrial heat alternatives. That cycle has many decades to run, assuming hydrogen is a viable alternative energy source, and like Tesla at some point the revenue numbers will catch up with the share prices.

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Maybe, although I must admit that I am not entirely convinced. I am old and ugly enough to remember the first hydrogen/fuel cell mania although I concede this time it might just be different.

 

 



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