In the last 12 months global markets have experienced significant volatility. Meanwhile, headline-grabbing stocks like Nvidia have pulled indices to new heights. As tempting as it is to chase the obvious winners – which is often a successful strategy, until it is not – investors wanting to achieve more consistent returns should resist the urge to put all their eggs in one basket and balance these bets with others.
For those seeking diversified exposure to global equities and consistent returns, it pays to look beyond the obvious and consider what is being ignored or overlooked. This is where the value of professional financial advice becomes clear: advisers can help clients maintain discipline, diversify effectively, and avoid the risks of herd mentality. Good advisers set themselves apart by guiding clients through periods of change and complexity.
As the global economy continually changes, aligning investments with those cycles and structural changes is not only intuitively sensible, if successfully executed it is likely to be the most certain strategy for success.
At Nanuk, our purpose is to help clients manage the risks and opportunities associated with the structural transition towards greater resource efficiency and environmental sustainability. Over the past 10 years, our flagship New World Fund has delivered an average annual return of 13.5 per cent p.a., underscoring the opportunities and the effectiveness of a disciplined fundamental and valuation-led exposure to sustainability-aligned themes.
We don’t believe that investing in areas aligned with a ‘better world’ is an ethical or moral proposition – although doing so can provide these intangible benefits for clients and advisers alike. Rather, it is a pragmatic response to achieve good investment outcomes in a world that is inevitably changing.
For us, that means exposure to high-growth technology stocks like Nvidia that are driving productivity improvement and efficiency across the economy, as well as companies that are supporting the delivery of AI in a more sustainable manner – such as renewable energy, cyber security and compliance certification.
It also extends to totally unrelated industries delivering more sustainable outcomes in other areas of the economy, from waste management and recyclable materials to EVs and energy efficiency – many of which are being overlooked amidst all consuming hype about AI’s potential to change everything and a US administration seeking to stem the tide of change in the economy.
Surprisingly to many, during Joe Biden’s presidency we maintained very limited exposure to renewable energy equities. In short, we felt that excessively high valuations were never likely to be justified by companies with challenging industry economics, despite the benefits of potential subsidies and support from the Biden administration. Doing so proved prudent.
Ironically, clean energy stocks performed extremely well during the first Trump administration even as it sought to withdraw its support, but that investment outcome was a result of valuations in 2017 and 2018 that were similar to what we see today. This is the opposite of what most advisers would expect. It’s also, counterintuitively, contrary to the direction of policy developments during those presidential terms.
This outcome in markets reflects a concept called “thermostatic public opinion”, which is the tendency for public policy to shift away from the government’s position over time. In practice, this means that when government support for clean energy wanes, expectations eventually rise for support to be increased again – and vice-versa.
As a result, clean energy stocks represented good value around the time of Trump’s election, and with ongoing pessimism towards net zero targets and uncertainty about short-term policy support, we see further opportunities ahead. Periods of short-term uncertainty within more predictable longer-term trends often lead to great opportunities that are widely overlooked.
For those who believe in the long-term structural transition to sustainability, now is the time to revisit many of the industries that are driving the transition. Not just as a matter of principle, but as a diversifying source of returns.
The improving economics of a wide range of more sustainable and efficient solutions will ensure that the global economy keeps transitioning, irrespective of shorter-term policies and political cycles. By combining thematic research, fundamental stock selection, and valuation discipline, we can build concentrated portfolios positioned to benefit from long-term structural change.
As we celebrate ten years of our New World Fund, our focus remains on seeking opportunities in a changing world and identifying new areas of outperformance for our clients and the financial advisers who support them.
Tom King, chief investment officer, Nanuk Asset Management
