As investors face a number of challenges, notably climate change, portfolio managers of the Infrastructure Securities Fund at Quaero Capital, highlight their firm's top stock picks this month.
As investors become increasingly concerned about climate change and the energy transition, Mark Ebert and David Giboudeau (pictured), portfolio managers of the Infrastructure Securities Fund at Quaero Capital, discuss their top stock picks with WealthBriefing this month.
“The world is experiencing climate change and the need to
transition towards a greener and eventually net-zero world.
Infrastructure is usually at the heart of every major change
happening in the world,” they told WealthBriefing. “This
is all the more important as power demand will grow – it has been
flat for multiple years in the advanced economies – driven by the
connection to the grid of equipment that used to run on
carbon-emitting energy sources: vehicles, heating systems, and so
on,” they said.
While most people think of solar and wind farms when it comes to energy transition, Ebert and Giboudeau focus on the key enablers of the power sector transformation: the power grid. “As a rule of thumb, for every $1 invested in renewable power generation, $1 needs to be invested in transmission and distribution assets. This regulated segment of the power value chain is most attractive because it will benefit from the gradual decentralisation of the power grid induced by the increased share of renewables in the power mix,” Ebert and Giboudeau continued.
Here are their top stock picks.
Transmission and distribution asset owners: SSE and
“SSE is a UK utility company operating three businesses: renewable energy generation, regulated transmission and distribution networks and flexible generation. SSE is deploying billions of pounds' worth of capex in onshore and offshore wind farms while investing in the required transmission network. This will generate double digit profit growth for these two highly visible and defensive businesses.
“On top of this, the group owns some 6.8 Gigawatt (GW) of flexible generation which benefits from the increased power price volatility induced by the growing share of intermittent renewables in the power mix: while power supply is increasingly weather dependent, the demand will grow and be unaffected by such factors, causing greater price volatility as we can already see across Europe.
“Similarly, the German power generator RWE is poised to benefit from its installed base of gas plants that will stabilise the grid while the group increases its renewable installed base from 13 GW to >40 GW in 2030. While the near-term profit trajectory is dampened by the phasing out of their nuclear and coal assets, and the moderation of spot power prices, underlying profits are growing at a double-digit rate. The current price does not value any growth beyond the assets currently under construction, while the group is a key pillar of Germany’s independence from Russian gas while also being one of the largest renewable developers worldwide,” Ebert and Giboudeau said.
Digital transformation and increase in data consumption:
“As much as the energy transition, the increase in global data consumption is a major trend, even in advanced economies, driven by the gradual 5G adoption, AI, and the cloud economy. Telecom tower companies are the backbone of this move: they rent their towers to telecom operators creating telecommunication networks. Inwit is a tower company in Italy with 24,000 towers. As the Italian 5G network is being built, Inwit hosts more and more clients on their towers, which is the equivalent of renting an apartment to multiple tenants at the same time at zero incremental cost.
“On top of this, Inwit benefits from a 100 per cent consumer price index (CPI) indexation on their multi-year contracts, creating tremendous value for the group in current times. Their growth out to 2025 is mostly already contracted which will enable Inwit to grow profits at 15 per cent per year over the period, while returning cash to shareholders via a mix of dividends and share repurchases,” Ebert and Giboudeau continued.
Quaero Capital Funds (Lux) - Infrastructure Securities
Quaero manage the Infrastructure Securities Fund which provides a liquid alternative to what has traditionally been the domain of private equity. The objective of the strategy is to provide a long-term thematic vehicle with daily liquidity for investors wanting to take advantage of the sector’s unique characteristics: low correlation to markets and business cycle, high correlation to price indexes, diversification benefits for an equities portfolio and protection in difficult markets.
The fund aims to recognise the long-term impact of the infrastructure sector by supporting only those companies which are industry-leading on environmental and social responsibility and stewardship, or are on a path of committed improvement, provided that they follow good governance practices.
Founded in Geneva, Quaero Capital is a specialist fund management group. It offers a range of investment strategies through its Luxembourg, Swiss and Irish regulated funds as well as private equity funds investing in European infrastructure and French real estate. See more here about the firm's ESG and climate related investments.