In the event, there was no explosion. Instead, there was a clean-up effort that lasted years and the undamaged reactor did not reopen until 1985. However, the public’s confidence in the safety of nuclear power had eroded and Three Mile Island was eventually closed in 2019.

Grow your own

Despite the energy source remaining shrouded in speculation, in September 2024, Constellation Energy announced that Three Mile Island would be reopening, with Microsoft as the sole purchaser of its energy on a 20-year contract. The motivation? Powering Microsoft’s data centres for the growing presence of AI.

Microsoft is far from the only company to anticipate the burgeoning need for energy in coming years and to take matters into its own hands. However, as investments in AI have shot up in recent years, investments in energy, and specifically renewable energy, have tanked.

See also: Aegon: Data centres are the new dividend drivers

By 2030, the US Electric Power Institute estimates the energy demands of data centres could account for more than 9% of all US energy consumption. Currently, this sits at 4%. Jim Wright, fund manager of the Premier Miton Global Listed Infrastructure fund, says the phenomenon could lead to “a land grab” for energy supply and generation, exemplified by the Microsoft deal.

“The requirement for additional electricity will stretch the system capacity, particularly at seasonal and daily demand peaks. The inevitable solution is more investment in generation capacity, which will include renewables, batteries, gas-fired generation and nuclear power,” Wright explains.

“The costs, lead times and technological and regulatory challenges make new nuclear, either in the form of Small Modular Reactors or large power plants, a longer-term solution. There is considerable momentum, as shown by Meta’s recent request for developers to provide between one and four gigawatts of new nuclear capacity in the US to power its AI data centres.

“The growth in electricity generation capacity will require significant capital expenditure and changes the long-held perception of electricity utilities, which may now be classed as ‘growth stocks’ for the next decade.”

Read the rest of this article in the January edition of Portfolio Adviser Magazine

Investors are on edge, grappling with uncertainty on multiple fronts as the US election fast approaches. With the outcome seemingly hanging in the balance, the potential impositions of blanket tariffs from a Trump presidency on all trade is concerning many. Such a move could spell trouble for the global economy, bringing potential implications for long-term geopolitical stability and fiscal discipline.

One significant tail risk we are monitoring is the impact of the US fiscal balance sheet. At around 4%, treasury yields are not overly concerning, but they reflect some uncertainty. While we do not anticipate a UK-like event in the US — a major bond sell-off akin to the Truss mini-budget moment — continued volatility in the bond markets leading up to and potentially beyond the election is likely.

While it is notoriously difficult to predict election results, and therefore subsequent policy of future administrations, the possibility of a Trump presidency focused on additional fiscal expansion and deregulation could push inflation higher, raising the yield of long maturity bonds as investors price greater long-run uncertainty in US bond markets. This ripple effect could inevitably be felt across the broader global bond market, as the US remains the benchmark for global fixed income.

See also: Morningstar: What does the US election mean for investing in China?

The potential imposition of blanket tariffs by Trump is especially concerning. While this could give a short-term inflationary boost to industries such as traditional energy, financials and defence, it could be disastrous for global growth over the long term. Take tariffs on China as an example. These have already led to a decline in US-China trade over the past few years and increased trade deficits with other countries. This rebalancing effect of blanket tariffs on US trade partners would complicate global trade dynamics.

The US economy has been sending mixed signals in recent months. The challenge lies in the core components of inflation, which seem inconsistent with the cut of over 1% the market expects from the Federal Reserve in the next 12 months. This creates a dilemma for the Fed, which must balance lowering inflation with a strong but potentially weakening labour market.

Historically, equity markets have shown more volatility during close and contentious elections. Given polling data indicates a tight race hinging on a few swing states, such uncertainty could spur heightened market volatility as investors react to polling trends and shifting political dynamics. While markets tend to calm after an election, investors should not assume smooth sailing in the immediate aftermath.

Policy changes, particularly those related to fiscal spending, taxation and regulation, could significantly impact sectors such as technology, energy and healthcare. leading to heightened market volatility as investors react to polling trends and shifting political dynamics.

Despite the noise, investors should remain steadfast: focusing on long-term fundamentals and preparing rather than predicting. Forecasting market responses to elections or economic data is fraught with risk. But discipline is needed — diversifying portfolios, managing risk and avoiding overreactions to short-term market moves.

While the election presents both short-term risks and opportunities, in line with past elections it is unlikely to have an impact on the medium-term expected returns of asset classes, but will stir potential short-term challenges.

While global bond yield curves may steepen globally pushing up longer term interest expectations, bonds remain an attractive asset class to hold with fears remaining around economic growth. We may also see volatility in equity markets as traders react to each other post-election, focus should be on the medium-to-long-term fundamentals — such as earnings and the discount rate — that will drive equity returns and ultimately client outcomes.

See also: Weekly Outlook: US election, UK and US interest rate decisions

Currency markets are also an area that may see volatility, especially if election results are delayed in swing states. However, we see little immediate threat to the US dollar’s status as the world’s reserve currency. Despite speculation, neither the euro nor renminbi are poised to replace the dollar.

Investors therefore should assess any risks within their portfolio and ensure they are resilient to adverse outcomes, while remaining flexible to seize opportunities that may arise during periods of extreme market stress.

Whether we face a Trump 2.0 presidency with potentially higher inflation or a Harris-led government which would likely be more of a continuation of the current administration, it is important to ensure that portfolios are diversified and robust.

By maintaining a disciplined, medium-term view and avoiding being swayed by the noise, investors can navigate the election with confidence, focusing on fundamentals rather than short-term volatility.

This article was first seen in our sister publication, PA Adviser

Donald Trump is heading back to the White House. His last presidency was characterised by tariffs, trade wars and tax cuts, and there is every sign that the next one will have a similar flavour.

However, clear-cut policies are thin on the ground, and markets are inevitably speculating about the likely winners and losers. We don’t have a hotline to the Oval Office, but there are areas we’ll be keeping an eye on during Trump 2.0.

US smaller companies versus the technology giants

While Trump’s laissez-faire view of business has left US markets upbeat, a closer examination of the implications of a potential tariff regime may require a more nuanced view.

M&G pointed out: “The National Federation of Independent Business (NFIB) Small Business Optimism index moved up dramatically after the 2016 election – it will be interesting to see if that is repeated. While Trump will likely impose additional tariffs, they will probably be less than that expressed while on the campaign trail. They will, however, result in retaliatory tariffs from US-affected trading partners.”

See also: How will Trump’s tariffs impact markets?

In other words, the global trading environment is going to get tougher. That will hurt international business around the world, including the US. The technology giants need international markets to thrive, to support their supply chains, and to buy their services.

At the same time, smaller, more domestic companies should be beneficiaries of reshoring and should look more competitive. Given the relative value of smaller companies versus the mega-caps, we would favour diversifying US exposure into funds such as T. Rowe Price US Smaller Companies Equity or Schroder US Mid Cap.

The energy sector

A Trump victory ushers in a new environment for energy generation, and marks a major break with Biden’s Inflation Reduction Act and support for decarbonisation.

John Chatfeild-Roberts, manager on the Jupiter Merlin Balanced Portfolio, said: “Energy features large in Trump’s economic strategy. The US is almost 100% self-sufficient in oil (it exports some grades in which it has a surplus of supply over domestic consumption, while grades it does not have in sufficient quantities have to be imported).

See also: ‘Inflationary’ and ‘volatile’ or ‘good for growth’?: Trump declares victory in 2024 US election

“Trump has said that he’s ‘gonna drill, baby, drill’. Gasoline (petrol), diesel and heating oil are fundamental to most American households and businesses: keeping the price of fuel down is perceived as the equivalent of a tax cut but more importantly, helps moderate inflation.”

This approach is likely to weigh on the renewables sector, which has been an early casualty of the Trump revival. The iShares Global Clean Energy ETF dropped almost 7% on news of the result.

Global consumer goods

The global consumer goods sector may be particularly vulnerable to any new tariff regime. Consumer goods companies selling into the US are likely to look increasingly uncompetitive, particularly where there are cheaper domestic alternatives. This is more likely for basic consumer goods than for, say, specialist semiconductors.

There are other potential weaknesses. Reuters reported data showing that a number of the packaged goods companies could be exposed by higher tariffs on Mexico. These companies have invested significant sums in their Mexican supply chains and built up significant manufacturing bases there.

Importing goods into the US could become more difficult and expensive. The impact will remain unknown until the level and structure of the new tariff regime is announced, but it could create volatility for these businesses.

What about China?

The Chinese market has fallen in the wake of Trump’s victory, having had a strong few months on the back of the government’s recent stimulus package. It is not news that Trump has China in his sights, and that tariffs are likely to be onerous.

However, this needs to be weighed against the Chinese market’s low valuations, the recent stimulus package and lower US interest rates.

Edmund Harriss, manager on the Guinness Asian Equity Income fund, said: “With the Federal Reserve in the US cutting interest rates, China now has room to cut rates without putting significant pressure on the Renminbi. One of the constraints facing policymakers for the past few years was that the Fed was hiking rates, and if China cut rates, the interest rate differential would have increased.

See also: Morningstar: What does the US election mean for investing in China?

“Hot money would have left China in chase of higher yields in the US, putting pressure on China’s capital account and the Renminbi. Now this is no longer true as the Fed has started to cut rates, giving the PBOC room to follow.”

He pointed out that the government’s stimulus package extends to the stock market: “A total of CNY 800bn was set up by the People’s Bank of China, of which CNY 500bn ($71bn) is allocated for a swap facility which brokers, funds and insurance companies can use to buy stocks.

“The remaining CNY 300bn ($43bn) is to fund a re-lending facility, which listed companies and major shareholders can use to fund buybacks and stock purchases.”

The bond markets

The other key vulnerability in a Trump presidency could come from the bond market. The US treasury market has already wobbled on the news of his victory, with yields rising as inflation expectations are pushed higher.

Futures markets have started to price in fewer interest rate cuts over the next few months on the assumption that Trump’s economic measures will drive prices higher.

Economists believe that Trump’s agenda will add around $7.5trn to the existing deficit of $35.6trn. This puts the US in line for its own ‘Liz Truss’ moment. Trump has promised efficiency measures at the heart of government, saying this could be led by Elon Musk.

The US also has special privileges on its debt, thanks to the Dollar’s position as the world’s reserve currency, but it may not be able to outrun bond market maths indefinitely.

Trump isn’t a complete unknown. Investors have a pretty good idea of the direction of travel, even if the shape of his policies is not yet clear. These are the areas we’ll be watching from January 2025.

Thomas Edison would be shocked by the ways electricity has been used since he helped market its potential back in the 1880s. He’d be even more astonished to learn that, despite all the technological advances this century, electricity usage in the US remained flat, owing to grid efficiency gains, until 2021. This has all changed over the last two years.

The use of artificial intelligence has begun to intensify electricity demand. Edison was not the first to use electricity nor did he in fact invent the lightbulb. His success was in taking existing technology and making it commercially viable. Likewise, AI has been used for years, but it is the start of its commercial proliferation that is so exciting to investors.

How best then to get exposure to the AI theme? We ought to remember how Edison’s story ended. He was ultimately defeated by a superior commercial technology. For us as investors, predicting the winner is what counts in these nascent technologies, not just who did it first.

See also: Japan election uncertainty prompts carry trade concerns

Yet it is hard to tell who will have the best lightbulb. Will ChatGPT supplant Google search? It is hard to know. What we do know is that a ChatGPT query uses up to 10 times more electricity than a Google search.

The rush for commercial uses of AI therefore sets the stage for sustained electricity demand. A 2-3% increase in electricity usage since 2022 doesn’t sound like much, but in the context of the trillions of watts in existing global demand it is massive.

Newer data centres, the ones required for commercial AI, can require up to one gigawatt of electricity capacity annually. One megawatt is what a big box retailer uses (think an out-of-town Tesco). A gigawatt is roughly what it takes to power San Francisco, or 1000 Tesco’s. A new data centre could theoretically need a similar amount of power to San Francisco.

See also: Simon Edelsten returns to join Alex Illingsworth at new venture

So who are the real winners here?

We think there are two – energy producers and the enablers of energy related infrastructure.

While the big tech companies battle over AI supremacy, they are united by their requirement for electricity. All forms of energy production should benefit from this next leg up in demand. In the context of climate change, data centres specifically need clean (carbon free) baseload (always on) power generation.

Wind and solar are clean but suffer intermittency. Oil is dirty but can provide power when it is still and cloudy. Natural gas goes someway to reconciling this problem, as it is cleaner than oil while being accessible and affordable in the US. That is why exposure to responsible oil and gas producers is quickly becoming a derivative exposure to AI and part of the reason they form a part of our portfolio.

See also: Asia Dragon proposes merger with Invesco Asia

Better yet NVIDIA, Microsoft, Meta, Amazon, Google and Oracle have all made pronouncements on the need for zero-carbon nuclear energy to become an increasing part of the mix to properly fuel data centres.

A nuclear power plant being specifically built to plug into a data centre might sound like science fiction, but it is quickly becoming a reality as small modular reactor (SMR) projects take off. Nuclear reactors must have uranium, which is another theme for us.

Not only should the commodity producers benefit, but so too will the servicing companies, pipeline operators and shippers. The infrastructure surrounding energy transmission and transportation is just as important as what it is produced from.

See also: FCA: Under half of 5380 misconduct cases made since 2021 are resolved

We hold companies that stand to benefit from a continued surge in AI demand regardless of which version of AI wins – such as those helping to develop data centre sites, creators of pylons and steel utility poles, plus the IT infrastructure including servers

These themes and companies are less obvious beneficiaries of an AI boom, but they have the potential to be just as rewarding. They are cheaper and less well known than the big tech companies while still growing quickly and carrying far less risk of technological supplantation.

We think these areas go one better than the picks and shovels in the AI gold rush. The energy related commodities and industrial infrastructure companies have the potential to be more like the wood and iron from which the picks and shovels are themselves made.

However, focusing on ‘old energy’ options seems a backward-looking approach, and may fall foul of increasing regulatory pressures.

The BlackRock Energy and Resources Income investment trust aims to bridge this gap, investing across the entire spectrum of energy generation. At any one time, the portfolio will include traditional fossil fuel companies, renewable energy and supply chain providers, and mining companies.

The trust started life in 2005 as the Commodities Income Investment trust, launched by the then-Merrill Lynch commodities team. It was inaugurated amid the commodities supercycle, a once-in-a-generation bull run for commodities prices fuelled by the industrialisation of China and India. It initially targeted an income of 4.25%, but also significant capital growth.

See also: More rigorous ESG fund classification necessary as uncertainty remains

Investors may be familiar with the rest of the story. China’s growth slowed, the supercycle ebbed and mining companies struggled to shake off the legacy of excessive capital spending. The Commodities Income trust continued to invest in mining and conventional energy until June 2020, when it became increasingly clear that a change of strategy was needed.

Portfolio manager Tom Holl says: “The trust had a focus on income, but also growth because of the supercycle. As that supercycle matured, the trust became a lot more focused on just the income element. Both the mining and conventional energy sectors were less ‘growth’ and more ‘value’.

“When we and the board reflected on the trust, we came up with two challenges to address. The first was structural growth – mining and conventional energy are not areas of structural growth. China is still the world’s largest consumer of most commodities and the growth rate has clearly slowed. On the conventional energy side, oil demand grows at around 1% per year. You might fund sub-sectors within it, but it’s lower than the wider market.

“So we thought, how can we introduce a growthier element?”

Introducing sustainable energy was the obvious choice. This was also made possible by the growing maturity of the sector. When the trust was first launched, sustainable energy companies were still niche, technology was in a breakthrough stage and very reliant on subsidies.

See also: 94% of investors consider defence stocks ESG friendly

Holl adds: “Companies were immature, small-cap and unprofitable. But those same companies had now grown up. While there were still venture-stage businesses and new technology, there were also very established companies.

“The breadth of what was defined as ‘energy’ had really changed. We wanted to introduce the energy transition into the portfolio to really capture that broader definition.” The trust set a neutral weighting of 30%.

Read the rest of this article in the September issue of Portfolio Adviser magazine

UK equity income funds have outperformed their global and technology peers during the three years since the beginning of the cost-of-living crisis, according to research from AJ Bell, although Indian equity, US and commodity funds found themselves at the top of the pack.

While IA Global and IA technology & Technology Innovation funds have achieved double-digit returns over three years in nominal terms, at 13.5% and 10.8% respectively, they have still lost investors money in real terms, at 5.6% and 7.8%.

UK equity income funds have achieved an average gain of 16% over the period. Despite this relative success, it has still not quite been enough to see a positive return in real terms, having fallen by 3.5%.  

Top of the performance chart for nominal and real returns over the last three years are Indian equity funds, with the IA Indian/Indian Subcontinent sector having returned 46.7%. In real terms, this amounts to 22.1% in total return terms.

Other sectors to have achieved positive total returns in real terms since the start of the cost-of-living crisis are IA North America, IA Commodity/Natural Resources and IA Global Equity Income, at a respective 3.5%, 3.2% and 0.5%.

Laith Khalaf, head of investment analysis at AJ Bell, said the “surprising” fact that UK equity income funds outperformed their global and tech counterparts could be because of their exposure to energy stocks, as these produce a significant proportion of UK dividends.

“This exposure has afforded some protection to investors during the inflationary crisis,” he said. “Indeed, the UK Equity Income sector has outperformed the broader UK All Companies sector by 10 percentage points over the last three years (the latter has returned 5.6% compared to 16.0% from the UK Equity Income sector). UK Equity Income funds tend to have a larger cap focus than UK All Companies funds, which prefer to go hunting in mid and small caps – areas which have performed well over the long term, but not the last three years.”

A large chunk of UK dividends emanate from the energy and banking sectors, and this exposure has afforded some protection to investors during the inflationary crisis.

It also means the UK has kept up with the global stockmarket over the last three years, exhibiting a 4.7% return in 2022.

“Both the global and domestic stockmarket have managed to stay ahead of inflation over the last three years, which given soaring price rises is no mean feat,” Khalaf said. “The FTSE 100 in particular has stood up well, and its performance is in line with the global stockmarket.

“That’s partly because the FTSE 100 contains a large dollop of oil and gas companies, which have benefitted from higher energy prices. On top of this, banks have seen their net interest margins rise as base rate has climbed. The FTSE 100 also has more ‘jam today’ stocks which prospered in the market rotation that took place when inflation started its ascent, eroding the value of more distant cashflows and the appeal of ‘jam tomorrow’ companies.”

Impax Asset Management has been in the sustainability business for more than 25 years, with Jon Forster joining Ian Simm and Bruce Jenkyn-Jones in 2000. The team has seen the sector evolve from a niche, volatile market to a more global, mature investment opportunity. They have evolved with it, and now run £39bn in a range of different strategies.

See also: Discounting net zero: Investment trust sector ‘re-embracing’ ESG values

Impax Environmental Markets, the UK’s largest environmental investment trust, was launched in 2002, and now has £1.2bn of total assets, according to AIC data. The broad investment proposition hasn’t changed since launch, says Forster: “The thesis is that companies that are finding solutions to environmental challenges are going to grow at a faster rate compared with the global economy. And if we can understand that sector well and pick the right stocks, we can translate that growth into long-term outperformance of global equities.”

However, the opportunity set has changed meaningfully. When the group first started, the environmental universe was limited to energy, water and waste. “It was quite niche but has become far more diverse over the years,” he says. The fund now covers clean and efficient transportation, sustainable food and agriculture, ‘smart environment’, which includes digital infrastructure and artificial intelligence (AI). ‘Waste’ has become ‘the circular economy’, which incorporates recycling and waste management, and is now a much broader sector.

Forster adds: “The fund is offering investors pure exposure to the growth of environmental markets. It’s small and mid-cap biased, and it has a growth orientation, but at a reasonable price.”

However, it has been a tougher period for environmentally focused assets, with wind and solar assets in particular in some difficulty. At the same time, small and mid-caps have significantly underperformed, and growth as a style has also struggled. There has been some row-back on the energy transition, particularly in the US. Targets have been pushed out as some major asset owners in the US have railed against the inclusion of ESG principles from fund managers.

This is unwelcome, but does not disrupt the long-term picture, says Forster. He believes the recent run of weakness has brought valuations down to attractive levels and presents a real opportunity for investors who believe in the long-term transition story.

See also: Morningstar: ESG funds are cheaper than conventional strategies

Forster is in no doubt about the durability of environmental change and is encouraged by changing consumer preferences. “If you think of the big upheavals in the global economy, consumer preference has been a key part of that,” he explains. “This has been a driver for environmental change – from the VW ‘Dieselgate’ scandal to the war on plastics. All of these changes were catalysed by the consumer, with governments looking to align themselves.”

Policy and regulation remain another key driver of change. “There is still a ‘policy ratchet’. The policies get tighter over time, energy policy standards are building, water treatment quality standards are improving. That is a potent driver of growth. Have we seen some paring back? Yes. But does it change the destination? We don’t think so.”

Read the rest of this article in the July/August issue of Portfolio Adviser magazine

Managing money through a smartphone has become commonplace for many people as banks have expanded into apps for easier access. But now, purely digital banks have carved out a space in the market, and in some regions, allow people access to a bank account for the first time.

Sara Moreno, fund manager of the PGIM Jennison Emerging Market Equity fund, was drawn to this potential for financial inclusion with Brazil-based Nubank, which began as a credit card issuer and has now expanded into a range of banking services as it aims to become Latin America’s largest financial services provider.

While Nubank, trading under Nu Holdings, has remained almost level in share price over the past five years, in the past calendar year there has been a 56.9% increase to $11.83 (£9.32).

Moreno said when Nu was finding its footing, the company applied a unique strategy when it came to approving customers: new members had to be referred by a friend to join, similar to a club.

“It’s the concept of ‘tell me who your friends are, and I’ll tell you who you are’. And that’s how the programme started. There was a long waiting list, and by getting to know you first, then [the bank was] more comfortable getting to know your friends and your family. But it also created this allure of, ‘When am I going to get the invite?’.”

One of Moreno’s analysts also decided to join the app to see what would happen when he stopped making payments. Instead of letting him continue, the bank sent notes mentioning the lack of payment and providing a variety of instalment options to allow him to put payments back on track.

While Nu built its base in Brazil, the company is now expanding into Mexico where Moreno believes there will be a second market ripe with opportunity.

“It goes back to the addressable market and it’s so large. Mexico is 125 million people and half of them don’t have a bank account. So it’s that ability to serve a customer at a very cost-efficient level with much better information.

You start by giving them a little loan. The average revenue per user is not very high, but once you start stacking more products, those numbers start to pick up,” Moreno said.

The idea of product stacking is where Moreno believes Nu will be able to grow margins and continue to expand once it has built out its consumer base.

“It’s just like any other internet platform. It’s about servicing your customer just a bit better than at a bank. But these companies service you on a much better level and they can leverage technology very efficiently,” Moreno said.

“They’re moving to payroll, secure lending. They can then bolt on asset and wealth management and do a lot of layering on. That’s the beauty of ecosystems that are digitally native, you can then start to stack on that. And because cost-to-income ratio is so low, the traditional bank can never get there.”

New City is punching above its weight

Ian Francis, manager of the £288m CQS New City High Yield fund, believes the trust’s ability to take part in smaller debt issuances is a key factor in its long-term outperformance against its larger peers.

Francis argues that due to the fund’s size, it can afford to be more nimble than larger funds in the space, allowing New City to take advantage of smaller debt issues its bigger peers wouldn’t usually be able to, due to being forced to buy up the entire debt issue and shoulder unpalatable levels of risk.

“If you’re a larger asset manager running a lot of funds, you have got to have the big issues to play,” he said. “You can’t really play in anything under £250m, which is quite a big space.

“In our top 10, we have got Aggregated Micropower, which produces the biomass boilers for local authority buildings and schools. It’s been there for a long while and has an 8% coupon.”

Francis has managed the investment trust’s portfolio since 2007. According to the trust’s latest factsheet, its Aggregated Micropower coupon makes up 4% of the trust. Meanwhile, its largest position is in a Co-Op Bank coupon which makes up 5.63% of the portfolio.

“Another [smaller issue] would be REA, which produces sustainable palm oil. It’s a very well managed business and we are big holders in that.

“Elsewhere, we do have some deals out of Scandinavia, such as Gaming Innovation Group, which is quite a small one. Cab Online, which is Swedish, but a lot of its fleet is electrical, so it is really bringing the green element to [the sector].”

He added: “Again, you can’t hold any of those if you’re a larger name and running billions, so it allows us to be fairly flexible with what we have. We can look at something like a $75m issue.

“The minimum size I consider is £50m, in which we might have a million pounds. Because, while we buy to hold, we want to be able to get out if it goes wrong and liquidity is an important factor.”

Overall, 85% of the trust’s portfolio is currently made up of corporate bonds, while the remainder comprises preferred shares, equities and convertibles.

According to the Association of Investment Companies (AIC), the trust has returned 32.6% over the past five years compared with the AIC Debt – Loans & Bonds sector average of 18.9%. It currently trades at a 6% premium and has a dividend yield of 8.62%.

On the back of a competitive bidding war for Hipgnosis Songs fund, New City recently took profits from its stake in the music royalties investment trust and placed them into the Next Energy Solar fund, which traded on a 30% discount gave a yield of 10.9% at the time of the transaction in April.

Nikko invests in post-Covid wanderlust

As millions gear up to spend their summers abroad, the Nikko Asset Management Global Equity team is excited about the prospects for global travel stocks.

The sector was hit hard by the impact of Covid restrictions as flights and holidays ground to a halt. Coming out of the pandemic, the longing for ‘revenge travel’ saw demand soar over the past two years.

While some may consider this demand spike to be a ‘late-stage’ cycle, Nikko AM global equities portfolio manager Iain Fulton believes there are still opportunities in the sector as consumers continue to spend on overseas travel.

“We had such excessive consumption of goods during the pandemic and under-consumption of services,” Fulton said. “That balance has largely redressed, but we think that while consumers are still in fairly reasonable shape, there’s a high propensity for them to continue to spend on experiences and travel.”

“We particularly like Booking Holdings,” he added. “Booking has been really successful for us. We bought it coming out of the pandemic as we recognised that travel was definitely going to come back, and there was a lot of pent-up demand.

“Shares had obviously struggled during that period where no one could book trips, everyone had these deferred holidays that had been cancelled and so there was a fallow period. Booking used that period to acquire and grow its market share and to push into new areas such as alternative accommodation and car rentals along with flights.

“That created a bigger addressable market, and it is growing into that. That position has always been pretty meaningful in the portfolio since early 2021. We’ve taken a little bit of profit along the way as it’s performed well, but it remains meaningful now.”

Since falling to a five-year low on 20 March 2020 at the onset of Covid restrictions, the Nasdaq-listed stock has risen 238.8% up to 21 June of this year. It is up 14.6% so far in 2024.

“Importantly, Booking Holdings is also taking market share from Airbnb within the alternative accommodation market,” Fulton added.

“A significant portion of the business now is in alternative accommodation, and that has allowed it to take a larger share of the booking wallet.

“That was all while in a company that was priced as if this was a cycle and it was going to mean-revert, but that valuation has actually continued to hold up and return on capital has recovered now to above where it was in 2019. It has acquired very well through that downturn, putting it in a stronger position as we’ve come into this cycle right now.”

The Nikko Asset Management Global Equity fund is a top-quartile performer over one and five years, according to FE fundinfo data.

This article first appeared in the July/August issue of Portfolio Adviser magazine

After one of the least surprising election results in history, Keir Starmer moved into no.10 Downing Street on 5^th July. This had long been anticipated by bond, equity and currency markets, which barely moved in response, but markets will now start the long process of looking at Labour’s plans more closely, who will be the winners, and who will lose out.

At a macroeconomic level, the focus on growth is likely to be welcomed. Labour’s target of an annual 2.5% rise in GDP may look unambitious compared to the UK’s growth rate in the 1990s and early 2000s, but would be a lot faster than has been seen since the financial crisis. Economists remain sceptical that it can be achieved with the measures laid out in the Labour manifesto, but it is at least, a statement of intent.

Overall, stock markets greeted the result with equanimity. Incoming Chancellor Rachel Reeves has done much to quell investors’ fears over spending, while the chunky majority secured by Labour gives some welcome stability to UK politics. The election result comes at a time when UK markets were already showing signs of a turnaround.

Alexandra Jackson, manager of the Rathbone UK Opportunities fund, says: “The prospect of stability and economic growth in the UK should give a boost to UK business, as well as to company share prices and investor flows into our asset class. We have a bias to UK mid-cap companies. While they are mostly global in nature (less than half of our portfolio revenues are generated in the UK), our companies are often seen as highly correlated to the UK domestic picture.”

She believes that the recent run of strong performance from UK markets can continue: “Investors may look to the UK as something of a safe haven in a challenging global market, fraught with political uncertainty and highly concentrated returns.”

The impact on housebuilders

There are a number of specific sectors that may be impacted by a Labour victory. Housebuilding is top of the list. Labour’s housebuilding targets are for one and a half million new homes built within the first five years of its term, “delivering the biggest boost to affordable housing in a generation, creating new towns and ensuring first dibs for first-time buyers”.

This requires a ‘blitz’ of planning reform, including a‘planning passport’ for urban brownfield development. This sounds good for UK housebuilders, but may come with strings attached. Housebuilders sit on considerable land banks and Labour may force some quid-pro-quo on putting this land into use.

Rathbone Income co-manager Alan Dobbie says: “A combination of more clarity around the path of mortgage rates and greater political acceptance that the current system is not working could be enough to push housebuilder share prices on from here. Crucially, their balance sheets remain in very good shape, with many housebuilders holding more cash than any debts they have outstanding.

“And with many dividends rebased at a more sustainable level, there’s increasing clarity around the investment case.” The share prices for housebuilders have spiked higher since Labour’s victory.

Renewed focus on energy infrastructure

From what we know so far, energy infrastructure remains a priority, particularly for green energy. After some rolling back on the UK’s energy transition ambitions in recent years, Labour has laid out plans to make the UK a “clean energy superpower”. It says it will build new infrastructure to help address greenhouse gas emissions from heating, transport, agriculture and industry.

It also plans to create a long-term strategy for transport and is committed to the creation of a National Infrastructure and Service Transformation Authority. Its infrastructure plans also include digital infrastructure, including the rollout of 5G and high speed broadband connections across the UK.

The previous government had similar plans, but found them difficult to implement. The reforms to the planning system could help to ensure that these infrastructure plans do not get stuck in the same way as, for example, HS2.

The government has said it will need private sector investment to support these initiatives. It may create a more predictable investment environment than the one that has prevailed over the past few years. This should be a boost for the infrastructure sector, which has had a difficult period. Funds such as the VT Gravis Clean Energy Income fund, which is 47% invested in the UK, may be beneficiaries.

Other managers are looking at this area in more detail. Alex Wright, manager on the Fidelity Special Values fund, says: “The UK election is one of the many inputs to our investment process, but one area of interest is Labour’s commitment to speeding up the UK’s transition to renewable energy. Infrastructure will be an essential part of that build out.”

What about oil companies?

Labour has been keen to burnish its business credentials. However, this largesse does not extend to the oil majors. Labour is proposing to raise just over £6bn across the next parliament through increasing and extending the Energy Profits Levy. This started life as a ‘windfall’ tax on the profits of oil and gas companies, but will continue even though the high oil and gas prices from Russia’s invasion of Ukraine are now in the past.

Elsewhere, the party has said it plans to stop the development of any new oil and gas fields in UK territory if it forms the next government. This was inevitable if the UK was going to stick to its commitments under the 2015 Paris Climate Agreement, because the UK’s existing oil and gas reserves will already produce more than the UK’s fair share. 

That said, the oil and gas sector has shown itself reasonably immune to the windfall tax to date. There is still enormous demand for fossil fuel and many oil and gas companies are generating sufficient cash to pay good dividends to shareholders, and undertake multi-billion pound buybacks. Their pariah status has ensured that valuations are relatively low.

Fidelity’s Wright says that the commitment to remove the North Sea investment allowance will “clearly hurt” that part of the oil and gas sector, but fund managers remain polarised on whether to invest or not. Groups such as Evenlode avoid oil and gas and extraction industries. In contrast, funds such as Rathbone Income have BP and Shell in the top 10 holdings.

Ultimately, the winners from this change of government are likely to emerge over time. The King’s Speech and Autumn Statement will give a clearer indication of the policies ahead. That said, there are a few sectors in the spotlight of a new administration and investors should stay alert.

Electric vehicles, batteries, solar panels, and windmills dominate the headlines around the energy transition, but they are only a fraction of the whole project. Boring bits of the system may do just as much to propel the transition forward.

Yet you do not need to be a sustainability focused investor to see the benefits. The appeal for us is simply that these neglected companies may be much more attractive investments.

Cables, for example, are less widely discussed but represent a quarter of the cost for an offshore wind project, with the world needing to roll out about 5,000km of subsea cables every year.  

To demonstrate how parts of value chain fit together, let’s start with a typical offshore wind project – the Galloper wind farm off the eastern coast of England.

Its 56 windmills were built and maintained by Siemens Gamesa (a unit of Siemens Energy), while Helix operates a fleet of undersea robots and support ships for the undersea trenching and burial work for the cables connecting those turbines.

On top of these, there is also Prysmian manufacturing the high-voltage cables themselves, which connect the project to adjacent windfarms and a further 45 kilometres back to shore.

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As the world adopts broadly dispersed power farms located far away from cities, our energy system will become much more cable intensive. Cables can represent a quarter of the cost for an offshore wind project, and to support wind farms and international interconnectors, the world will need to roll out about 5,000km of subsea cables every year (outside of China, which uses its own suppliers).

That is good news for Prysmian, which is the largest of only three major Western firms with the specialised factories to make those cables and the specialised ships to lay them.

All that underwater work also augurs well for Helix. It turns out that the skills (and robots) that are useful for servicing offshore oil wells transfer quite well to servicing offshore wind farms.

Wind farms are not the only source of growing cable demand. Existing grids need cables too, in part because the world’s electric grids are aging. On average, grid equipment in the US and Europe is older than it was ever designed to operate – in some places, people are charging Teslas using cables installed before World War Two.

The US Department of Energy reckons we will need to expand grid infrastructure by 60% by 2030. Globally, that translates into $650bn of estimated grid investment every year – double the level of recent years.

A system juggling intermittent power sources, batteries, home solar panels, power-hungry artificial intelligence data centres, and electrified cars and factories will be both more burdened and more complex than the grid is today. More electricity needs to travel longer distances in more directions to more locations, and the likes of Siemens Energy and Mitsubishi Heavy Industries are well placed to benefit from these increasing needs.

See also: Kevin Murphy exits Schroders after 24 years

However, intermittency – power sources that are not always on – poses challenges beyond grid infrastructure. As systems become more reliant on wind and solar power, they need to keep the lights on when the wind isn’t blowing and the sun isn’t shining.

Drax, a UK power generator, provides reliable baseload electricity as it can run its biomass plant 24/7. It also plays a role in energy storage with its ‘pumped hydro’ facility in Scotland.

When power is plentiful and cheap, Drax uses electrical pumps to move water uphill into a reservoir, then later lets it flow back downhill through turbines when power is scarce and better priced.

But the move to a cleaner energy system is bigger than just the electric grid – it also involves industry and buildings. Companies need to electrify their operations and switch their heat source from coal to gas.

Beyond industry, buildings of all kinds can be much more energy-efficient than they are today. In Europe – where buildings account for 40% of total energy consumption – companies such as Signify bring a simple solution: just replace the lights.

Lighting accounts for nearly half of cities’ total electricity use, and replacing inefficient lights with Signify’s excellent LED systems can cut the related carbon emissions by 75% or more.

The preceding sketch barely scratches the surface of the major energy transition themes, but it is an encouraging story. There are challenges and trade-offs, but these companies are applying their skills in innovative ways.

We think these seemingly boring companies have strong prospects that are underappreciated by the market.

Drax for example, trades for less than five times earnings, while Helix and Signify trade for less than ten times free cash flow. Siemens Energy is struggling to work through quality control issues at its wind turbine unit, but the long-term value of its businesses is substantially higher than its current market capitalisation.

The energy transition features no shortage of complexity and controversy. Put those together, and it also features plenty of investment opportunity.

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Operationally, meanwhile, infrastructure companies have continued to perform well.

And yet it has been a grim couple of years for the asset class. In the three years to 31 January, the FTSE Global Core Infrastructure 50/50 index has delivered an annualised return of 4.4%, compared to 8.9% for the MSCI World. This gap has been particularly acute during the past 12 months, when the MSCI World index gained 17.6%, versus a fall of 2% in the infrastructure index. This, says Emily Foshag, manager of the Principal Asset Management Global Listed Infrastructure fund, is where the opportunity may lie in the year ahead.

Operationally, infrastructure assets have been doing what they’ve always done. They provide essential services, operating as regulated, contracted monopolies, such as utilities, transportation, infrastructure, airports, ports, toll roads and energy infrastructure. This may include renewable infrastructure and oil and gas pipelines, and more recently, communications infrastructure such as cell phone towers and satellites. They are cashflow-generative, with inflation-protected revenue streams.

The problem has largely been one of sentiment and circumstance. Foshag says that while infrastructure usually does well during a recession versus global equities, the 2020 recession was an anomaly.

See also: #InspireInclusion: How can asset managers maintain momentum?

“The nature of the health crisis had a disproportionate impact for infrastructure companies. It was difficult to be an airport or a toll road business during Covid.”

Energy infrastructure was also hit by a weaker oil price. Since then, there have been other problems. “In 2021, the market was very focused on post-vaccine recovery. Cyclical stocks were hot, so infrastructure trailed again,” she says.

In 2022, infrastructure fared better, but from the start of 2023 the sector has struggled against rising interest rates. Flows have come out of the sector, as investors have moved back into fixed income and cash.

However, it means the stocks have got cheaper. Foshag says: “We’ve been banging the table that the relative valuations of global infrastructure versus global equity look attractive. If you look at enterprise value to Ebitda multiples, historically infrastructure has traded at a slight premium. That premium is the lowest it’s been since the global financial crisis.”

Listed infrastructure also trades at a significant discount to unlisted infrastructure. Foshag says the difference between the two sectors has widened to around 30%. “There’s a strong valuation argument for infrastructure today.”

See also: Schroders launches energy transition infrastructure LTAF

Equally, many of the factors supporting infrastructure assets are still in place, she says. For example, Principal is expecting annual investment in the energy transition to increase to around $2trn (£1.6trn) in the second half of this decade, up from $1.4trn from 2021 to 2025. Western economies need the productivity boost that global infrastructure development provides.

A recent report from McKinsey found the world needs to invest about 3.8% of GDP from 2016 to 2030, or an average of $3.3trn a year in economic infrastructure just to support expected rates of growth.

Read the rest of this article in the March issue of Portfolio Adviser magazine

Five years ago, infrastructure trusts were trading on an average premium to their net asset value of 3.9% – today, shares in those same trusts are selling at a 30% discount.

Valuations of investment companies have sunk below their net asset values (NAV) across the board, but those investing in renewables and infrastructure have fallen particularly sharply, dropping almost three times as far as the 11% discount on the average trust.

However, the investment case for renewables and infrastructure remains the same despite their widening discounts, potentially providing investors with an appealing entry point, according to James Carthew, co-founder and head of investment company research at QuotedData.

“There just doesn’t seem to be a floor to it and some of them are going out to ridiculous discounts,” he said. “People are just not responding to logic there.”

Indeed, the main appeal of renewable and infrastructure trusts – their high levels of income over the long term – remains unchanged despite the widespread selloff, Carthew added. These portfolios invest in multi-year projects that provide consistent streams of revenue, with trusts such as Harmony Energy Income and NextEnergy Solar offering yields as high as 15.4% and 10.8%.

“Everything that is happening with infrastructure and renewables [trusts] annoys me, because a bunch of people invested in it for its long-term income stream, so they shouldn’t be trading it the way that they have been,” Carthew said.

“The way people have been trading in and out of it over the past year doesn’t make sense. You’ve locked in income for the next 20 to 30 years – if you were happy with that when you bought it, why don’t you just stick with it?

“You still have the income you paid for, so are you really fussed about the short-term fluctuation in the NAV if you’re a long-term investor?”

This is something that Ed Simpson also noticed in his role as head of energy and infrastructure at Gravis. He said many of the investors who bought renewable and infrastructure trusts for income migrated into fixed income assets as their yields rose sharply last year.

“The yields on renewables have become relatively less attractive, so people have sold out and caused a large portion of those discounts for shares,” Simpson explained. “People have taken a slightly lower yield through government debt and other fixed income, which I think has been a big challenge for share prices – I would argue that this has been overdone.

“Fundamentally, renewables are still needed. There’s a massive need to build out a huge amount more renewable infrastructure in order to meet any of the main parties’ commitments to reaching net zero. So there’s a strong business case for this financially and sustainably as well.”

There is still a high volume of money being invested into renewable infrastructure over the next few decades. The McKinsey Global Institute estimated that governments would collectively need to invest $9.2trn (£6.8trn) a year to reach net zero by 2050.

But investors may not have to wait too long to see the share prices of investment trusts in the sector return closer to their NAVs. Matthew Read, senior research analyst and head of production at QuotedData, said improving monetary conditions could lead their deep discounts to narrow significantly.

He expects broader infrastructure trusts with exposure to a range of assets in the sector to move first, with portfolios specialising in renewables alone trailing behind.

“People seem to be more comfortable with infrastructure than just renewables,” Read added. “I think infrastructure trusts are just better understood.”

Some of the biggest renewables trusts such as NextEnergy Solar, Bluefield Solar Income and Greencoat UK Wind (collectively holding £4.3bn in assets under management) could be some of the first to see their discounted shares undergo a re-rating.

Read said that buying into any of their high long-term yields at such steep discounts makes it “hard to see where you could go wrong” by investing in them.

NextEnergy Solar, Bluefield Solar Income and Greencoat UK Wind have fallen to discounts of 29.9%, 23.6% and 15.3%.

These big players in the renewables space may be well positioned for a rebound, but some smaller trusts are also overdue a re-rating, especially Pantheon Infrastructure (PINT).

Read said investors lost some confidence in the £376m trust during the downturn because of its relative infancy (having launched in 2021), but it could come swinging back from its 20.8% discount once markets appreciate its potential.

He said: “It is not small, but in the scale of infrastructure trusts, it is comparatively small. I think people mostly forget that the depth of expertise at Pantheon is huge.

“The management team can run this standing on their head, so imagine if it delivers on a few things, interest rates come down, and it goes to asset value – it can start growing the trust again from there and absolutely take off.”

Similarly, the VH Global Sustainable Energy Opportunities and Octopus Renewables Infrastructure trusts are two relatively newer and smaller portfolios that William Heathcoat Amory, managing partner at Kepler, pointed out as having overly inflated discounts. Shares in the trusts are trading 35.4% and 22.6% below their NAVs respectively.

Even if investors do not see an immediate reversal of those discounts in the near-term, these trusts are likely to give shareholders double digit NAV returns from this starting point, Heathcoat Amory added.

“The evident climate and energy security benefits of renewables have resulted in a favourable policy backdrop, with governments worldwide committed to boosting net zero investment,” he said.

“While it’s always possible to find short-term headlines about various governments failing to meet targets or revising spending plans, overall the backdrop is constructive, and long-term trends remain strong.”