Strong inflows into clean energy ETFs have pushed valuations of the various subsectors higher. To mitigate downside risks, a broader perspective on the sustainability theme is needed. Semiconductor manufacturers in particular are interesting, says Thiemo Lang, manager of the RobecoSAM Smart Energy Fund.
‘There is a lot of attention in the media for climate change. Moreover, President Joe Biden’s plans to invest huge amounts in sustainability have received wide coverage. As a result, there is a lot of interest in the clean energy sector,’ notes Lang.
A lot of money is flowing into clean energy ETFs. ‘That can be dangerous, because these ETFs do not distinguish between companies and buy everything in the index,’ says Lang. The iShares Global Clean Energy ETF, for example, now has more than $7 billion under management and invests only in about 30 companies, which are mainly active in renewable energy generation. ‘The strong flows into clean energy ETFs have certainly contributed to the sharp rise in price/earnings ratios in this subsector. In addition, valuations of hydrogen companies in particular have risen sharply recently.’
High valuations
The S&P Global Clean Energy Index is a widely used index for this sector and is priced at around 56 times this year’s expected earnings. Lang: ‘This is quite high. However, the momentum is so strong that prices will probably plateau before a correction takes place. But we are keeping a close eye on this. Currently, our exposure to the very expensive subsectors is limited to 15-20 %.’
Morningstar uses the clean energy ETFs in peer group analysis for the RobecoSAM Smart Energy Fund. That’s why Lang benchmarks his fund’s performance against these ETFs. But compared with these passive products, the RobecoSAM Smart Energy Fund has a much broader approach to the clean energy market, he says. ‘I would estimate our exposure to wind and solar producers or their suppliers to be only 10-15% of the total portfolio. We try to focus on the whole clean energy value chain. This includes companies active in mid- and downstream activities, smart grids, energy management, energy efficiency and energy storage. Valuations in these subsectors are more attractive, while barriers to entry are higher.’
At its launch in 2007, the fund had much greater exposure to commodity-type markets such as solar energy, Lang says. ‘Those stocks went down a lot in the 2008-09 crash. After that experience, we decided to diversify the portfolio to make it less vulnerable to severe market corrections. This was already visible in the first quarter of last year, when we did not do worse than the MSCI World Index. Our goal is to perform no worse than the broad market during corrections and to do better in an upturn.’
E-car market explodes
Semiconductor manufacturers are heavily represented in the portfolio, with a weighting of almost 40%. This mainly concerns the power semiconductors segment for power conversion. Lang regularly receives questions about this from investors.
‘We see these power semiconductor producers as playing a key role in the energy transition. Power semiconductors are essential for the energy efficiency requirements of buildings, transport, industry and IT end-markets. There is a structural growth trend that will continue for at least 10 years, and probably even longer. It’s not just about chips for electric cars or charging stations. You also need them in the latest generation of highly efficient motor control systems for automated production lines in industry and for electric heat pumps or for the efficient operation of data centres that use a lot of electricity.’
According to Lang, producers of these components therefore play a crucial role in the transition from fossil fuels to renewable energy. ‘Compare it to the role of, for example, Intel in our IT infrastructure, says Lang. ‘In the long term, we expect sales growth of 9% per year on average for power chip manufacturers throughout the cycle. In the electric car submarket, growth is more likely to be 20-30%. The market for electric cars is exploding at the moment. Especially in Europe, where volumes will more than double this year. China, too, is easily showing a 50-70% growth in volume this year. The fund is benefiting from this market growth not only through stakes in semiconductor manufacturers, but also through direct investments in Chinese e-car manufacturers such as Xpeng and Nio.’
The portfolio is trading at around 31 times this year’s expected earnings, a small premium to the price-earnings ratio of the MSCI World Index of 27 times earnings. But the much stronger earnings growth of 27.5%, compared to 20% for the MSCI World, more than compensates for this, Lang believes.