Hiroshi Watanabe/DigitalVision via Getty Images
Policy – You Can’t Live Without Them, But You Can Live With Them
Our inaugural commentary from last quarter highlighted the many announcements made by the U.S., Europe and Asia at the United Nations’ 26th Annual Conference of Parties (“COP26”) in Glasgow. It was evident that the most powerful actors on the global stage had come together to push for net zero greenhouse gases. The euphoria quickly dissipated over the next two months. The long-awaited Build back Better bill in the U.S. was stopped by Congress. A seemingly regressive proposal on net energy metering policies for California utilities (“NEM 3.0”) was revealed. It became clear that Europe was experiencing an energy crisis, which brought attention to the region’s speed of its energy transition. These factors, when combined, cast a shadow on the environmental sustainability landscape to the detriment related equities.
In the fourth quarter, equities whipped around amidst policy and broader macro uncertainty, including inflation and potential earlier-than-anticipated rate hikes in the U.S. Investors spent some time digesting the information and are taking a cautious stance heading into 2022, as uncertainty lingers around Build Back Better and other legislative and regulatory outcomes. In a fast-growing industry, high-level policies can have a significant impact on the short-term sentiment. This is especially true if they are trying to replace decades-old policies and players and facilitate a smooth transition without anyone being left behind. This underdeveloped landscape is ripe to disruption. Technologies and services that can demonstrate bankability and the ability generate profitable, sustainable growth should win, in our opinion.
Volatility is almost inevitable and could possibly be viewed as a “blip”, in the journey forward for energy transition investments. The pledges in Glasgow represent a major step forward for major companies, governments, and institutions towards net zero targets. As long as these commitments are maintained, we believe we have reached an inflection point where the market can accelerate rapidly in the development and deployment technologies and services that address this cause.
A look back on the Quarter
The VanEck Environmental Sustainability Fund (MUTF:ENVAX)The fourth quarter of 2021 saw a return of 1.98%, which was below the broad-based MSCI All Country World Index’s 2.18%.1(NASDAQ:ACWI)The same period saw a 6.7% return for, While inflationary and interest rate risks kept growth stocks under control, certain sectors were subject to unfavorable regulatory policies.
EV Continues To Drive Performance in Advanced Materials
Tesla (NASDAQ:TSLA)(3.95% of fund assets), Infineon OTCQX:IFNNY (3.80% fund assets), Freyr (NYSE:FREY)Performance for the quarter was led by company-specific achievements (3.85% of assets), which speaks to the ongoing growth of the EV and batteries supply chain and the importance in delivering key performance indicators. Infineon is a favorite holding due to its 40% exposure to EV power semiconductors and the ongoing shortage of chips in which pricing could bring incremental upside to margins. Freyr, who has licensed the 24M lithium ion manufacturing method, was approved by Volkswagen Group (OTCPK.VWAGY), who announced a partnership. We expect Freyr will find significant offtake for its battery capacity quickly, given the growing demand for batteries.
Smart Resource Management – Healthy Capex, Strong Pricing: All System Go
As a result, most holdings in the semiconductor and industrials sector were able to benefit from healthy global end markets. This was evident in Teradyne’s performance as a semiconductor test equipment manufacturer. (NASDAQ:TER)(1.38%) of fund assets, which we also believe is well-positioned for secular trends such as the increasing complexity and industrial automation. Trimble is also a leader of collaborative robot (“cobot”) technology. Trimble is an infrastructure GPS solution provider (NASDAQ:TRMB)The fund assets account for 3.09% of total fund assets. It continues to weather supply chain problems well and is focused on delivering its software subscription momentum.
Mixed Bag In Agri-Tech
The quarter saw significant weakness in food-based, consumer-facing holdings as part of the wider pullback in equities. The slowdown in growth was not able to support high valuations. This was partly offset by strong biofuels, with Bunge BG (1.78%) continuing to execute well. They have a strong environment for oil seeds crushing and have experienced successful restructuring as they refine the business.
Renewable Energy – Everything but the Kitchen Sink
California’s net-metering proposal was discussed earlier pressured names for solar, with residential solar developers being hardest hit (Sunrun). (NASDAQ:RUN)Sunnova, 1.82% fund assets (NYSE:NOVA)1.54% of fund assets) were questioned as growth prospects and project return. This was due to the structure of the new rates, which would ultimately be harsh for solar homeowners. Although evidence is mounting to show that the proposal in its current form won’t pass, the subsector remains in risky territory until more clarity is available. We believe that the assets are too expensive and that project developers have already begun to shift away from a standalone solar sales model to a more integrated approach with electric vehicle and battery channels. However, the macro environment will continue to be a major driver of stocks in the near-term.
The relative strength of inverter manufacturers (Enphase) partially offset the negative residential solar performance. (NASDAQ:ENPH)Solaredge: 2.31% fund assets (NASDAQ:SEDG)1.99% of fund assets) which, despite greater solar volatility, ended quarter higher driven by their global diversification, ability to weather supply chain shortfalls better than peers, and ability to weather them better than peers.
These are the themes we are excited about in 2022 and beyond
Software and Artificial Intelligence (“A.I.”) At The Wheel
We believe that the pace of energy-transition enabling technologies will accelerate in this year. The convergence of energy producers and consumers, storage providers and data management systems creates a need for interconnected and predictive technology to oversee seamless communications among them. This is a requirement as solar, electric vehicle (“EV”) and overall electricity demand are increasing rapidly. (It is important to note that California’s NEM3.0 draft is seen as blatantly punitive for solar standalone. HighlySupportive of battery storage, Governor Newsom’s budget proposal also supports it2 toward climate change initiatives.)
We are especially focused on smart grid management solutions. These solutions help to connect supply and demand between producers and consumers more efficiently. The key role of battery storage in grid decarbonization is its ability to store and distribute energy in a way that reduces consumption and costs for both the utility and the consumer. Stem is one example of a software developer. (NYSE:STEM)Fluence: (1.83% fund assets) (NASDAQ:FLNC)A.I. is used by 0.6% fund assets. A.I. is being used to analyze consumption patterns in order to predict future usage. This could allow power providers to effectively anticipate demand and eliminate surges. With this technology, events such a Houston power crisis a year ago, when three consecutive severe winters and unprecedented energy demands led to the destruction of Houston’s power grid, could have been avoided.
The 1.2 Trillion Hours Opportunity
Although the next few years will be a race for automotive original equipment manufacturers (“OEMs”) in order to secure battery supply chains to support their EV growth aspirations there is another opportunity further out into the decade, where all OEMs are competing for pole position. Morgan Stanley (MS), estimates that human beings spend approximately 600 billion hours per year in a car. This number could increase by as much as doubling by 2040.3We believe the number is less important than the chance, which is to reimagine completely the hours that humans spend in “passive concentration”.
Autonomous vehicle (“AVs”) and EVs go hand in hand. While EVs address a significant portion of the carbon emissions from transportation, (cars and trucks make up 80% of transportation’s total share of carbon emission), an AV is more efficient. Platooning, which involves vehicles moving in tight formations to reduce aerodynamic drag, could significantly improve energy efficiency. It eliminates random start/stops and traffic avoidance. Although it is still many decades away from deployment at scale (Morgan Stanley once again estimates that it will be 2050 before fully autonomous cars account for 47% of the miles traveled), the technology has already begun to emerge in a variety if applications.
All things autonomous are not created equal. This is because there are different levels and applications for different vehicles. Current passenger cars are generally at level 2 (L2) with Tesla, the leader in automation, aiming to achieve full autonomy (FSD) in 2022.
Different levels of driving automation
Synopsys
Trucking, which has its own set of challenges, including regulatory and weight hurdles and safety issues, aims to be L4 by 2024. TuSimple is one of the many innovators in this space. (NASDAQ:TSP)Piloting “driver out” test runs is a success. Fully autonomous semi-trucks can navigate traffic signals, on-and off ramps and highway lane changes.
In agriculture machinery, Deere (NYSE:DE)The 8R, a fully-autonomous row crop tractor that can be used for large-scale production, was recently revealed (2.36% fund assets). Six pairs of stereo cameras allow for 360-degree obstacle detection. The machine can also process captured images to determine whether it should stop or continue. It also uses GPS-enabled programming called “geofencing,” which can ensure that the machine’s position is accurate to within a millimeter.
Although we are still early in deployment and not yet at scale, it is clear that autonomous tech offers significant opportunities for productivity and operational efficiency. There will be many bumps as new technologies emerge. We are closely monitoring this space.
Important Disclosure
All weightings of companies, sectors, and sub-industries as of December 31, 2020, unless noted otherwise.
The information presented does NOT constitute personalized investment, financial, legal or tax advice. Some statements may contain projections, forecasts or other forward-looking information. They are valid as of the date this communication and can be changed without notice. Information obtained from third parties is believed to be reliable. However, it has not been independently verified for accuracy and completeness and cannot therefore be guaranteed. The opinions expressed herein are those of the author(s), and not necessarily those of VanEck.
1The MSCI All Country World Index covers approximately 85% global investable equity opportunities. It captures large and middle-cap representation in developed and emerging markets. The MSCI benchmark is a Gross return index that reinvests as much of a company’s gross distributions. 2Source: https://www.ebudget.ca.gov/FullBudgetSummary.pdf. 3Source: The trillion-hour attention economy (and where Apple Car fits in).
All indices listed here are unmanaged indices. They include the reinvestment all dividends but don’t reflect transaction costs or other expenses associated with an investment in a Fund. Some indices may include withholding taxes. An index’s performance cannot be interpreted as a measure of a Fund’s performance. Indicators are not securities that can be invested in.
VanEck’s views and opinions are theirs. VanEck’s comments on fund manager issues are general and should not be taken as investment advice. Market conditions can change opinions. Any discussion of securities mentioned in the commentsaries is not an offer to purchase or solicitation to trade these securities. Fund holdings can vary. You can view a complete listing of Fund holdings at: https://www.vaneck.com/us/en/investments/environmental-sustainability-fund-envax/.
The Fund may invest in securities or industry segments that are underperforming other securities or the overall market. This could adversely impact investment performance. The Fund is also vulnerable to the possibility that companies identified by the Advisor do not operate in a way that addresses sustainability issues. The Fund’s ability and ability to invest according to its sustainability strategy could be affected by regulatory changes or interpretations.
Companies that promote positive environmental policies could not perform as well compared to companies that do. It can be difficult to identify issues that are engaged in environmentally beneficial business lines and investments in them may be volatile. Environmentally-focused investing is qualitative and subjective by nature, and there is no guarantee that the factors utilized by the Adviser or any judgment exercised by the Adviser will reflect the opinions of any particular investor.
Investing in the Fund can result in you losing money. An investment in the Fund should not be considered a complete investment program. The Fund investment may involve risks such as investing in equity securities, derivatives, and emerging market securities. environmental-related securities, foreign currency transactions, foreign securities, investments in other investment companies, management, market, new fund risk, non-diversification, operational, sectors, small and medium capitalization companies, special purpose acquisition companies. Small- and medium-capitalization companies may be subject to elevated risks.
Diversification doesn’t guarantee a profit, or protect against loss.
Investing can be very risky and volatile, with the possibility of losing your principal. Before investing, it is important to carefully consider the investment objectives, risks, charges, and expenses of a Fund. To obtain a Summary prospectus and prospectusThis and other information is available at 800.826.2333. vaneck.com. Before you invest, please read the summary prospectus and prospectus.
VanEck
Editor’s Note:Seeking Alpha editors chose the summary bullets of this article.