Focusing on earnings and the right areas of interest

By Penny Pryor

Focusing on earnings and the right areas of interest

Munro Partners recently listed their Munro Climate Change Leaders Fund on the ASX and has already had a significant amount of interest. Portfolio manager James Tsinidis explains the impetus for the fund and shares some insights into positioning the portfolio - or any portfolio really - for current market volatility.

Why did you decide to launch the fund?

We've been following this area of interest for about 15 years now actually, so although our fund as a dedicated climate strategy was just launched as an ETF, we've actually been investing in these types of stocks for 15 years. This fund is just 15 to 25 of those best stocks that we've found over that period of time, within that climate change universe of companies basically assisting with the energy transition to net zero.

We just thought we'd offer it as a dedicated fund to those that were interested in investing in companies that benefit from spending into decarbonisation. But we still do have exposure across all of our broad sort of global funds to this thematic as well. But it's more like a 10 to 20 per cent exposure in those funds and it's obviously 100 per cent of this dedicated fund.

What's the interest been like in this fund so far?

It's been really high, because everyone can basically see what we can see. You can see natural disasters on TV... things sort of trending in the wrong direction. And I think most people are now beginning to understand that it's not going to be enough just to go on our current path of decarbonisation.

The world is already gravitating to more voluntary solutions, like moving from your internal combustion engine car to your electric car, but it's not going to be happening quickly enough, that curve is not bending quickly enough. So, it actually needs to inflect to keep that 1.5 degree temperature rise as set out in Paris. At the moment, we're on that three-degree trajectory ... we basically need to spend a lot of money very quickly to bend that curve down.

I think a lot of people can see this transition is going to happen. So, there's quite a few tailwinds converging here at the same time, and I think that's why we've seen the interest from investors.

How do you pick the stocks in these relatively unknown sectors?

We're in the very early stages in decarbonisation. It's going to be a reasonably volatile ride, in terms of figuring out who that winner is in electric vehicles and who that winner is in renewable energy and so forth. But they're going to be big. They're out there.

I mean, we know who the winners are in tech, it's Amazon, Facebook, Netflix, etc. But we don't know who these winners are in renewables. We probably know who one winner is, it's probably Tesla. But we don't know who the others are.

But there's going to be a lot of them. It's not just going to be electric vehicles, it's going to be everything from renewables, to recycling to batteries, etc. There's going to be many many winners in this area. We thought that it would be a good opportunity to invest in these areas early in the S-curve.

How do you position a portfolio for the current volatility?

What you have to do in a volatile period is you've got to basically, hunker down your portfolio to the companies with the best earnings growth, those with the best balance sheets.

Some tech stocks that were relatively large stocks are down 50, 60, 70 per cent. But they're companies that haven't won their industries, they're in the money fight stage with other stocks, or other companies, and so they don't have earnings. They're spending every revenue that they get into marketing or building products or whatever. And they don't have that earnings backstop behind it.

In these volatile periods, what you really need to do is to basically circle the wagons around the most resilient companies in your portfolio.

What's your outlook for markets?

Obviously, the market is concerned about interest rates. We've obviously had a bit of a move from where they were at very low levels to higher levels now, but it's still quite a low rate.

I mean, the magnitude of the move from 1 per cent to 2 per cent, it's a big magnitude but when you think about it 2 per cent is your discount rate. And where would you rather have your money - earning next to nothing, or would you rather invest in in NextEra Energy in the renewables side, which is a highly profitable business which is growing 10 per cent per annum. Or would you prefer to invest in Google which is growing 20 per cent per annum with billions and billions on the balance sheet.

You know, I know where I prefer to have my money. So, companies like that aren't going to fall over basically. They will get knocked around by rates going up. But as long as rates don't get completely out of control, those stocks will find footings. But you're not you're not going to find footing in something without earnings yet.