A Growing Investment Universe Still Demands Discerning Analysis 

By Hamlin Lovell, NordicInvestor

“We essentially run the same strategy as we did 30 years ago, which we believe is reasonably unique. Only three people have managed the portfolio. Our DNA is outcome-based investing.  We invest in companies that provide solutions to global environmental and sustainability challenges” says Jupiter’s Head of Environmental Investment, Charlie Thomas, who has been at Jupiter since 2000, managing the Jupiter Global Ecology Growth SICAV. “We have been an Impact fund long before the term thought of” he adds.

Jupiter has always done their own ESG research partly because “no external providers existed when we started” says Thomas. Jupiter is distinguished by how it interprets the ESG data. “Most carbon reporting is fixated on backward-looking, scope 1 or 2 data. We focus on scope 3 data.  For example, a bus and rail company may have a large carbon footprint, but carbon per passenger is well below cars” points out Thomas, who studied Environmental Biology, and Environmental Technology at university. The value of some ranking systems is also limited by the fact that larger companies tend to get higher scores, partly because they can afford to produce extensive CSR reports. This has results that could be perceived as perverse, such as tobacco companies with high rankings.

One early approach to ESG – negative screening – can exclude a small percentage of listed companies, including tobacco firms, and may result in portfolios that have marginal tracking error versus conventional, broad benchmarks. A more active approach can lead to more focused portfolios of 50 or so stocks. Jupiter currently owns 62 stocks – and has an “active share” metric of 99.3%, with no exposure to the vast majority of sectors.

Since 1988, Jupiter Ecology’s investment universe has ballooned from under 100 to over 1,200 companies – in areas such as resource efficiency, renewables, waste and water solutions, organic foods, public transport, and demographic themes like health and education. Regulation and subsidies have spawned new industries and firms, and awareness of climate change is now global. But Jupiter are very selective investors, and Thomas places the portfolio’s valuation at a slight discount to global equities. The fact that alternative energy (at 10.1%) and energy efficiency (at 24.5%) are the largest sector weights is purely a consequence of bottom-up stock-picks such as offshore wind developer, Orsted and wind group Huaneng Renewables. The latter is one of only three companies owned in China, where concerns include governance and treatment of minority shareholders.

Long term but conscious of commoditisation risks

Jupiter Ecology team carry out 200-250 company meetings each year (and many more with non-executive directors), and have an average holding period of six or seven years, which is much closer to the average private equity fund than the average mutual fund. Some holdings, such as Denmark’s Vestas Wind Systems, have been held since its IPO in 1998 (though the strategy has traded around core holdings, top-slicing on rallies and adding on pullbacks).

Jupiter are not sentimental about sectors or companies and the reality is that parts of green investing are susceptible to the same boom and bust cycles as any other investment strategy. Occasionally, Jupiter Ecology has exited an entire sub-sector. One example was solar power in 2007-2008, where a field trip in China alerted Jupiter to overcapacity.  The managers accurately anticipated how China’s huge investment would create a glut that saw Germany’s market share drop from 85% to 5%, with most players going bust. Going forward from here, the plummeting cost curve means that solar is now the cheapest energy source in multiple geographies, and is becoming a disruptive industry without any need for subsidy. Thomas is now wary of overcapacity risks in the battery technology space, where China, South Korea, Taiwan and Japan are investing heavily, inspired by national pride, just at the point where costs could collapse, as they did for solar.

If commoditisation threatens profitability, Jupiter seeks out firms with sustainable and differentiated technological “moats” that cannot be competed away. “One example is sub-suppliers to growth industries, such as aviation, which is growing at 3-5% per year. Clearly, this implies more fuel burning, but “light-weighting” aircraft with carbon fibre can enhance fuel efficiency – even more so than advances in engines and aerodynamics. We own Japanese manufacturer, Toray Industries, which supplies Airbus and Boeing” says Thomas.

Management and governance

Exits partly arise through corporate activity: an average of 4.5% of the book gets taken over each year, and Jupiter are also circumspect around management change. “The average tenure of CEOs is coming down so the motivation for change is high, and this may not be in the long term best interests of shareholders” points out Thomas, who increasingly finds himself engaging with boards, as well as – or even instead of – executive management. “The quality of management and a strong governance and stewardship structure are important” he says. Tesla illustrates how seriously Jupiter takes governance. “With 80 new hybrid or electric models coming in, it is hard to back out a valuation that makes sense. We like real companies with real profits rather than blue sky stories. But regardless of valuation and competition, Tesla has dubious governance- buying into a solar company owned by Musk’s cousins. That is one of several reasons why we have never owned it”

Green bonds and multi-asset investing

For most of its 30-year history, Jupiter Ecology invested only in equities but now over 1 trillion USD of green bond debt has been issued, spanning the financial sector, investment grade, high yield, municipals, convertibles, governments and supra-nationals. The universe has now grown and broadened out to the point where Jupiter could contemplate running pure green bond mandates.

For now, Jupiter has opted for a hybrid model with a strategic asset allocation of 60% bonds and 40% equities in a lower beta, higher income strategy: Jupiter Global Ecology Diversified, which harnesses the acumen of Jupiter’s equity, fixed income and multi-asset teams in selecting which part of the capital structure offers the best risk-adjusted returns. “The same DNA applies to both our pure equity and our diversified strategy, they just have a different perspective on risk” explains Thomas.

Indeed, Jupiter is very discerning about which green bonds meet its criteria. “There is a big spectrum of quality on green bond labelling, partly due to the rush to issue green bonds with a positive marketing spin. We need to make sure we are aligned on outcomes, such as bank bonds used to issue debt to wind farms” observes Thomas. Jupiter prefers bonds with “additionality” – that finance specific new green projects – as opposed to those funding existing projects or simply raising general revenue.

The strategy also uses efficient portfolio management (EPM) techniques, and has been looking into put options on US equities for late 2018. “This is more from an insurance than a speculative angle. The pickup in inflationary pressures could pressure margins and raise interest rates” explains Thomas.

“We are doing something very different, so we can be a diversifier for all types of investors, not only ESG investors” sums up Thomas. Investors should also watch this space for upcoming thought leadership from Jupiter, which is bold enough to ask questions such as: are we at peak renewables?