James Miller, Portfolio Manager at Firetrail Investments, believes investors need to stop seeing the global decarbonisation push as a risk – and start seeing it as an opportunity.
“Sustainability is not a passing fad,” says Miller, one of several fund managers presenting at the annual Sohn Hearts & Minds Investment Leaders Conference on Friday.
“It is a trend that’s very much here to stay. A lot of people in the market are treating it as a risk to be managed, but we flip it on its head and think about it as an opportunity.”
Miller, who is a portfolio manager for Firetrail’s S3 Global Opportunities Fund, will be tipping a stock which he regards as a “future leader” – little known today but well placed to take advantage of the global push towards sustainability.
Miller, a civil engineer turned investor, worked in Macquarie’s funds management arm before joining some of his colleagues to set up Firetrail in 2018. He says the market is already overpricing some companies seen to be at the forefront of benefiting from climate change.
But he argues that there are a range of smaller companies set to benefit from changes afoot – the development of carbon credit markets and the development of the electricity grid to cope with renewable energy – which are still good investments today.
“Companies are at various stages of the (sustainability) journey right now,” he says.
“What we see now is a correlation between the larger the company, the bigger the team you have to tick all the boxes and in and fill out the forms on sustainability. But there’s a lot of smaller companies that are doing good things as well.
“What we’re trying to do is picking those companies that are early on in their journey. They may not be a sustainable leader today. But, looking out five years, we’re finding the companies that are going to be sustainable leaders of the future.”
Miller says some of the obvious companies to benefit from decarbonisation – operators of solar farms or manufacturers of wind farms – are losing money at the moment because of regulatory and other issues.
But he argues that astute investors should look for other ways to take advantage of the global trend for decarbonisation and increased energy efficiency.
He sees US forestry company Weyerhaeuser as one investment which is well-positioned to take advantage of the development of the carbon trading market in North America. Toronto-listed First Quantum Minerals, a copper producer, is similarly well placed to take advantage of the need for the resource in new electricity grids.
“Copper is used in all forms of electrification,” Miller says. “There are going to be huge changes in the grid in most countries around the world to adjust to intermittent sources of energy. First Quantum has mines in Panama, Zambia and Turkey. It has been operating for decades in these jurisdictions with minimal production issues.
“It is a stock we are very excited about which is generating strong free cash flows over the next three to five years.”
Archer-Daniels-Midland, the American multinational which is a big player in the soybean market, is another company which Miller says can take advantage of the demand for plant-based proteins. Soybeans can also be used as feedstock for biofuels.
New York-listed Carrier Global, an airconditioning and refrigeration manufacturer, is also well-positioned to take advantage of a push for more energy efficiency in buildings.
Miller sees the evolution of carbon credit markets, already well developed in Europe, as one emerging opportunity in the US given the support of the Biden administration.
“The US Inflation Reduction Act passed a few months ago allocates nearly $US400bn ($597.7bn) over ten years to various climate related measures,” he says. “It will provide a great boost to carbon sequestration, paying $US85 a tonne to store carbon in the ground, and payments of up to $US5 a square foot if you can increase your energy efficiency by installing smarter building systems including more efficient airconditioning systems.
“It’s going to be a great journey over the next few years and there are a lot of companies which are going to benefit if they are on the right side of it.”
Miller’s appearance will be the fourth from a Firetrail portfolio manager at the annual conference, this year in Hobart. The boutique fund manager now has 24 investment professionals managing more than $6bn in global equities.
Firetrail’s S3 Global Opportunities Fund, is one of its newest products, recently listing on the ASX to provide access for retail investors.
It has stakes in Microsoft, chip maker Micron Technology, Schneider Electric and Dutch telecommunications company KPN – but so far none in Australia.
Miller argues investors need to pay attention to macro risks such as rising interest and inflation while drilling down into the specifics of individual companies.
“You’ve got to understand how your portfolio is positioned in relation to these risks, as well as the opportunities presented by the stock itself,” he says. “You don’t want something from out of left field to wipe out the great returns you get from stock selection.”
Inflation and rising interest rates will be factors affecting all companies in the near future, Miller adds. The Firetrail team has recently reviewed its portfolio and considered the debt levels and maturities of companies invested in to assess their vulnerability to rising rates.
Miller says companies with low debt levels and tight cost controls can benefit from a period of inflation which allows them to put up their prices.
“For many companies, inflation can be a boost to earnings. “If you have a top line when you can grow your revenue by inflation and a cost base which is largely fixed you can get leverage flowing through earnings,” he says.
This article was originally posted by The Australian here.
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