Climate Change Strategy

By Lucas White | Lead Climate Change Portfolio Manager | Focused Equity Team

The GMO Climate Change Strategy performed extremely well in 2020, gaining almost 43% for the year, net of fees, with the stated benchmark for the Strategy, the MSCI All Country World Index (ACWI), only up around 16%. Coming into the year, we felt that the prospects for the Strategy were “more exciting than ever”, and after a tough first quarter during the Covid-19 sell-off, we felt the Strategy was extremely well positioned for the long- term…and then the long-term became the short-term as the market recovered more quickly than we could have expected and our Strategy performed particularly well.

Our Clean Energy positions performed well across the board last year with Solar, Wind, Biofuels, Batteries & Storage, and Clean Power Generation all producing impressive returns. In addition, our investments in materials underlying clean energy performed very well. Our Copper positions were up almost 60%, and our Lithium positions almost doubled. Investments in Agriculture, Water, and Energy Efficiency were generally more in line with the market or slightly below.

A few factors helped drive the strong performance last year. First, we would argue that many of the companies we held were deeply undervalued coming into the year; our portfolio traded at a large discount to the market despite having superior growth prospects. We believe our value orientation is unique amongst sustainability strategies. Second, the prospects of a Biden administration, China’s commitment to decarbonize by 2060, and Europe’s ongoing commitment to battle climate change all helped set the stage for our Clean Energy companies to rerate a bit and reflect more reasonable growth expectations. Finally, the companies delivered. We saw strong earnings throughout the year despite an extremely challenging economic environment.

This fundamental diversification benefit is something we’ve discussed since the launch of the Strategy. Our Strategy is less tied to the prospects for the broad economy and more tied to the clean energy transition. Struggles in the broad economy do not necessarily translate to struggles for our portfolio. As such, we expect our Strategy to be a strong diversifier in the context of an overall asset allocation mix, and we’ve seen that diversification at work since we launched the Strategy.

We reached a significant milestone in 2020 as we hit our three-year anniversary in April. It is amazing how much has changed in the last three and a half years. When we launched in 2017, I felt almost sheepish when discussing the Strategy with potential investors. After all, at the time, with the exception of some particularly forward- looking investors, climate change was rarely discussed as an investment issue, and clean energy was viewed with a fair amount of skepticism. Even the solar and wind analysts we talked to were bearish on solar and wind! Today it is clear that climate has become a driving issue for many investors, and sentiment surrounding the urgency with which we must address climate change seems to grow on a monthly basis.

We have now outperformed ACWI by over 8% per annum net of fees since inception. Obviously, we’re excited about and proud of our performance to date. However, we believe the opportunity is just gaining traction. We’re still in the very early days of a long-term secular growth story. Electric vehicles still only comprise 2-3% of overall vehicle sales. Renewables provide just 5% of our overall energy needs globally. Next-generation biofuels are just getting started. And our portfolio continues to trade at a significant discount to the market despite exciting growth prospects. In fact, our Strategy trades at a slightly larger discount now than it has on average since inception.

These are exhilarating times for our Climate Change Strategy. After a few strong years, we continue to find compelling investment opportunities where the market isn’t pricing in reasonable growth expectations and to uncover new ideas and opportunities in the climate fight.

 


 

Performance data quoted represents past performance and is not predictive of future performance.
Net returns are presented after the deduction of a model advisory fee and incentive fee if applicable. These returns include transaction costs, commissions and withholding taxes on foreign income and capital gains and include the reinvestment of dividends and other income, as applicable. Fees paid by accounts within the composite may be higher or lower than the model fees used. A Global Investment Performance Standards (GIPS®) compliant presentation is available on GMO.com by clicking the GIPS® Compliant Presentation link in the documents section of the strategy page. GIPS® is a registered trademark owned by CFA Institute. CFA Institute does not endorse or promote this organization, nor does it warrant the accuracy or quality of the content contained herein. Actual fees are disclosed in Part 2 of GMO's Form ADV and are also available in each strategy's compliant presentation.
The above information is based on a representative account selected because it has the least number of restrictions and best represents the implementation of the strategy.
Disclaimer
The views expressed are the views of Lucas White and the GMO Focused Equity team through the period ending January 2021 and are subject to change at any time based on market and other conditions. This is not an offer or solicitation for the purchase or sale of any security and should not be construed as such. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities
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