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Pacific Assets: why unsustainable oil could hit $5
David Gait, manager of the top-performing Pacific Assets Trust, warns investors about the implications of Tesla’s Powerpack and the frothy state of Asian stock markets.
David Gait, manager of top performing sustainable investment fund Pacific Assets Trust (PAC ), has warned that oil prices could plunge to new lows as a result of the clean energy revolution threatening the end of the internal combustion engine.
Pointing to the dramatic reduction in the cost of solar panels in the past six years and the development of renewable batteries such as Tesla’s (TSLA.O) Powerpack, Gait said oil could tumble to $5 a barrel if an alternative to the fossil fuel became widely available.
This would have huge implications for stock markets, said Gait, who compared today’s energy company shareholders to 19th century investors in the whale industry when confronted with the emergence of paraffin and other oil-based fuels.
‘Whales provided a great source of light and energy for 100 years but in 1860 the discovery of a less smelly alternative saw it collapse 90% very quickly,’ Gait told investors at Pacific Assets annual general meeting yesterday.
Global markets and the world economy are still reeling from the impact of the oil price more than halving from $120 to $57 last year. Crude oil prices have recovered a little to $63 but are struggling to make headway in the face of subdued demand and over supply.
Gait said: ‘It’s much more likely oil will hit $5 than $100 because of the collapsing solar price curve.’
He said the advent of portable energy storage systems, such as Tesla's recently launched Powerpack and Powerwall and their rival Powervault, could herald a new era of carbon-free energy for all countries in the world. Cheap storage systems for solar energy could revolutionise its use - without storage, its supply is volatile and difficult to feed into energy grids.
Gait of Edinburgh-based First State Stewart said he had no idea when that might happen but stressed the importance of reviewing his investment trust’s stakes in companies that could be affected.
With car makers like BMW (BMWG.DE) planning electric powered versions of all their models, Gait said it was time to consider the end of the internal combustion engine.
This meant much more than just avoiding shares in oil majors, the manager explained. For example, the trust has 1.5% invested in Weifu High-Technology Group (000581.SZ), a Chinese company involved in cleaning emissions from trucks. This was a classic sustainable investment, said Gaits, but he added it would struggle in the event of a wholesale switch by motorised transport to battery power.
Gait preferred not to invest in the providers of rechargeable batteries, however, arguing it was not clear which technology would prevail. Instead he chose to back companies that could benefit from a new market in cables connecting devices to the new power sources. He cited Delta Electronics of Thailand (DELTA.BK), PAC's fourth biggest holding, accounting for 3.8% of the fund.
Coca-Cola at $5?
As a long-term investor in well-run companies that contribute to the sustainable development of Asia, Pacific Assets also shuns the shares of companies peddling sugary and unhealthy food and drink, said Gait.
He explained the developing world was suffering from an obesity epidemic as more people adopted Western-style consumption habits.
While there were 25 million US citizens with type 2 diabetes there were 100 million each in China and India. 'The numbers are huge and the prevalence is double for some reason,' the fund manager said.
Ultimately, that was a problem that could see purveyors of sugary foodstuffs hit with punitive taxes or other sanctions by governments.
'If you're a food company and you haven't thought it through you could face very serious sustainability headwinds in future,' he warned.
Gait said it was conceivable that shares in Coca-Cola (KO.N), which trade at around $40, could also hit $5 if there was a backlash against the drink that had made the company world famous.
Pacific Assets' fifth biggest holding is Vitasoy (0345.HK), a Hong Kong-based food conglomerate, whose drinks contain less than half the sugar of Coca-Cola.
Gait praised Vitasoy for also insisting that all the soya beans it used were not genetically modified. Finding non-GMO soya was hard nowadays. 'That really tells says something about what they believe in,' he said.
Such policies have contributed to PAC's strong performance in recent years. In the 12 months to the end of January it beat rallying Asia markets with total shareholder returns of 37%. This left the portfolio with the best net asset value growth in its sector over one, three and five years. The three-year result also generated a £1.8 million performance fee for First State Stewart.
While that pleases Gait his biggest worry now is what he regards as the unsustainable level of Asia stock markets which have surged on the back of several years of money printing by the world's leading central banks.
He described China's A-share market - which until recently had registered a 150% one-year gain - as a 'casino', where a third of punters' profits from trading stocks disappeared in broker fees and commissions.
Fearful of a bubble, Gait has allowed the level of cash in the fund to rise to an all-time high of 11%. This had built up, he said, after being forced to sell good companies like Hindustan Unilever (HLL.NS) when their share prices reached exorbitant highs of 60 times earnings. Gait said he could not find anywhere to reinvest the money and was waiting for markets to fall and create an opening.
With 30% of the fund in low-yielding India shares, the board of PAC has had to warn that next year's annual dividend may have to be cut. It only held this year's payment by dipping into revenues, said the outgoing chairman David Nichol.
While that was a concern, Nichol reminded investors that PAC was primarily focused on growing their capital and that dividends were ultimately a secondary consideration.
PAC shares have often traded at a premium above the trust's net asset value but the recent issuance of new shares has seen them trade close to NAV.
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by Gavin Lumsden on Sep 30, 2016 at 17:23