Defensive times for green energy investment

Lang’s fund, which has €476m under management, lost 14.4% over the year. However, according to Cedrus Partners, a French consultancy focused on the sustainable investing industry, Lang’s fund was the best performer in its class, with similar funds having lost an average of 25.8% over 2011.

The fund also substantially outperformed the S&P Global Clean Energy index, which fell 42.6% over the year. However, as an illustration of the sector’s relative troubles, the MSCI World index fell by only 2.58% over the year.

Lang said the fall in sustainable energy stocks, like other global equities, was concentrated in the second half of 2011, when the deepening eurozone crisis saw investors flee for safety. However, the sector also has big structural problems, he said, which accounted for its precipitous decline.

Lang said: “The key driver in this sector has been policy, the efforts made by governments to make us all use renewable energy. This drove good performance for sustainable energy funds in 2006 and 2007, but after the financial crisis this has become more difficult, with policymakers focusing on economic growth.”

The other factor driving the market has been the emergence of Chinese and Taiwanese renewable energy firms, according to Lang. He said: “While they have performed very nicely as investments over the past few years, these low-cost producers have been putting a lot of volume out there, so it’s getting ugly for many, with significant margin pressure everywhere.

“A lot of companies are going to be reporting losses for Q4, and will again for Q1.”

The solar and wind sectors were the biggest disappointment for Lang. While his fund has historically been about 20% invested in solar energy, Lang pulled out of most of his positions in June, a move that allowed him to avoid a big sell-off in August and September.

Lang said sustainable energy investors should remember that, although strictures vary from fund to fund, most can exercise defensive options, even when they are investing in pure renewables. He said: “While upstream providers of solar or winds are very cyclical, and were badly affected by the oversupply and price pressure we saw last year, you can also invest in downstream options: power stations, distributors or hydroelectric power-generating companies. They have cashflows and offer dividends, which, in this environment, is the option you need to be taking.”

He added: “We’ve been burnt before on the stock markets, and we made a decision to shift over to the defensive side – and we were right. Last year was not the time to be a hero.”

Neither does Lang think boldness will become a virtue any time soon. He said: “We need to be patient. I am sceptical about re-entering upstream renewable energy equities in the near term. Their balance sheets will continue to deteriorate – and these firms will continue to burn money.”

Authored by Sebastian Walsh
Originally posted on Financial Press