Disclosure – Non-Independent Marketing Communication
This is a non-independent marketing communication commissioned by Jupiter Green. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.
Perhaps it’s because we’ve become so accustomed to government largesse over the past couple of years, but when Joe Biden signed the Inflation Reduction Act in mid-August it made a small ripple in the media, which returned shortly afterwards to the reassuringly familiar stream of catastrophising headlines.
And yet the bill contained lots of provisions that investors should take note of, particularly anyone interested in the clean energy sector. Through a mix of government spending, grants, and tax credits, Uncle Sam will be handing the industry approximately $370bn over the next decade.
Like any piece of government legislation, the bill contains lots of nuances and bits of fine print that need to be treated with some caution – this isn’t a panacea to all of the climate problems we face. It is also extremely broad in scope. There are pledges to reduce air pollution at ports, purchase electric school buses, and drive investment in minerals processing.
Nonetheless, the steps taken indicate the US government is serious about its pledge to halve its 2005 level of greenhouse gas emissions by 2030. It also positions the US as a prospective leader in the battle for dominance in the field of clean energy, with China now a major competitor in the space as well.
There are no guarantees for investors that this will benefit them, even if they are likely to be influenced by the Inflation Reduction Act in some way. Investments in research, for example, won’t necessarily translate into tangible benefits for companies, nor is it certain they will lead to any meaningful forms of innovation.
This is also an area of the market that can be susceptible to overexuberance. During the pandemic, for instance, we saw many companies in the battery manufacturing and electric vehicle sectors experience massive spikes in their share price, often on the back of no revenue, let alone profitability.
Avoiding the frothier side of the market and navigating what is often a complicated set of industries can be difficult, which is why handing the reins to an active manager can be a good choice to make. However, likely because it does require a more idiosyncratic knowledge set, there are actually very few investment trusts that specialise in the sector.
One of them is Jupiter Green (JGC), a closed-ended fund that invests across the environmental solutions industry, with holdings in firms that are active in areas like green mobility, sustainable agriculture, and freshwater systems.
As of September 2022, the trust has a meaningful weighting towards clean energy solutions, with companies in the sector comprising approximately 20% of the trust’s portfolio. That includes utilities businesses, companies that produce solar panels, and more tech-oriented firms that create energy management software.
Jon Wallace, who has been managing JGC since the start of 2021, takes advantage of the trust’s relatively small size by investing in firms from across the market cap spectrum. As a result, the JGC portfolio contains a unique mix of small and large businesses. The smaller contingent also includes some earlier stage businesses that look capable of delivering strong compounding growth in the future.
JGC has had a somewhat volatile year to date. Like other growth-oriented trusts it has seen some of its holdings lose their shine on the back of higher inflation and the prospect of a wider economic slowdown. From trading at a small premium earlier in the year, the trust’s shares were priced at a wide discount of close to 14% at the start of September.
However, a recent rebound in JGC’s share price has in large part been inspired by investor enthusiasm for the sorts of clean energy businesses that could benefit from the bill Joe Biden signed in August. For example, solar power company First Solar, one of the trust’s 10 largest holdings, has seen its shares rise to an all-time high in September after spending most of 2022 in the doldrums.
These are positive early signs but long-term returns are ultimately more likely to be delivered by higher quality businesses, as opposed to short-term spikes driven by views on how legislation may benefit a company. Even if many companies are potential beneficiaries of the proposed tax credits, that doesn’t mean all of them are worth investing in.
This is where JGC’s approach is most likely to be beneficial to investors. In an area of the market that requires very specialised expertise, Jon and his team have proven themselves capable of sorting the wheat from the chaff and delivering benchmark beating returns to shareholders over the long-run.
The Inflation Reduction Act only adds fuel to the fire for these companies. While legislation like this is by no means a guarantee of success for the firms it affects, it does provide a potential tailwind for companies that would be likely to perform well anyway..
Taking all of that into account, investors may find this an opportune entry point for JGC. The trust’s wide discount, as well as the sell-offs we’ve seen in the sectors it invests in this year, may mean we’re in a scenario where investors have been unduly pessimistic about clean energy’s prospects. The current energy crisis, as well as government efforts to support the sector, show that clean energy is a necessity and that there is a genuine drive to make it work. Investors should think about how to prepare themselves accordingly.
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