With sales of cleaner vehicles continue to rise, investors may be better off backing the firms behind the technology rather than trying to pick a winning manufacturer, according to Liontrust Asset Management’s Peter Michaelis.
Michaelis, who co-manages the £247.3m Liontrust Sustainable Future Global Growth alongside Simon Clements, said there are better ways to benefit from the clean disruption in transport than investing in specific electric car brands like Elon Musk’s Tesla.
“We see a dynamic going on: the demise of diesel and petrol and the growing adoption of alternative fuel vehicles,” the manager said.
“We think the future is coming and it will come a lot faster than many people think, but does that mean we rush out and buy Tesla?
“No. We like the companies that are going to benefit regardless of who wins the transport battle.”
Michaelis said the slow shift away from traditional internal combustion engine vehicles towards hybrid or electric ones has been the hardest trend to dislodge during his investment career.
This, he noted, has to do with the widespread use of petroleum by-products as an energy source.
However, the Liontrust manager has witnessed the shift away from petrol and diesel back in the early 2000s as awareness of the introduction of harmful substances into the atmosphere increased, which is now driving clean disruption in transport.
Evolution of the global electric car stock
Source: International Energy Agency
“In transport the big trends are both reducing pollution with the move away from the internal combustion engine towards hybrid and electric vehicles and improving the safety of cars. These interesting trends are sometimes being underestimated,” he explained.
“If you want an opinion, ask an electric black-cab driver. I asked one of them and I was expecting him to say the electric vehicle is awful or to complain about the regulation,” said Michaelis.
“But he said: ‘the cab is fantastic, I earn £200 extra a week, customers love it, I love it and it is really easy to drive; I wish it’d come along sooner’.
“Given that taxi drivers are the ones campaigning and lobbing against any change, you see this is a much better technology people are increasingly embracing.”
In order to make the most of the growing popularity of clean energy, the Liontrust Sustainable Future Global Growth co-manager believes that investing in specific brands such as Tesla is not the best option. Instead, investors should look for certainties and broader themes.
“A certainty is that the cars of the future are going to be more intelligent and are going to have brains, which are semi-conductors someone has to produce,” he explained.
“A typical internal combustion engine of a car you buy today has about $300 worth in semi-conductor equipment, a Tesla has about $1,000.
“So, you have a threefold step change in demand as you have to manage the safety systems as well as the battery and the interplay with the combustion engine,” he explained.
Performance of stock over 5yrs
Source: Infineon Technologies
A company Michaelis believes plays well in that theme is the German semi-conductor and system solutions provider Infineon Technologies.
“Around 40 per cent of Infineon’s turnover is into automotive, so this secular trend is going to be in their favour,” he added.
“The company is also leading in terms of the efficiency with which they produce semi-conductors – energy efficiency, water efficiency etc. – which we think is an indicator of a very strongly managed business,” the Liontrust manager pointed out.
Another company the Liontrust Sustainable Future Global Growth team favours is Umicore, a global materials technology and recycling group that makes significant investments in clean technologies such as automotive catalysts and rechargeable battery materials.
“The demand for batteries is going to go up and we know part of that is going to be in the recycling and the refurbishment of battery materials,” he said.
“We believe Umicore is really well positioned for that theme in the battery technology.”
Regarding naysayers that claim the transition to alternative fuels won’t happen in a near future, Michaelis said the move from internal combustion-engine vehicles to those obtaining power from clean technologies will occur faster than many can predict.
“If you think about it, in New York city in 1900 every single vehicle was a horse-drawn car and back then the big environmental problem was: ‘what do we do with all this horse shit?’,” said the manager.
“The solution was technology, which back them was believed to be better, cleaner and cheaper: 13 years later, most vehicles were powered by internal combustion engine.
“At the moment, battery cars are looking like internal combustion engine cars when everyone was using horse-drawn vehicles in 1900, but that will change.
“This change happens extremely rapidly and, most interestingly, when you get it you look back and you think: that was so obvious back then.”
He added: “It’s difficult to predict that, for example, Nokia is going to disappear or BP is not going to be a constituent of FTSE 100. But this happens in investment markets: these big companies disappear.
“This is what we want, companies that are going to benefit from these rapid trends happening in transport.”
Performance of fund vs sector & benchmark over 5yrs
Source: FE Analytics
Over five years, Liontrust Sustainable Future Global Growth has delivered a 70.26 per cent total return compared with a 53.15 per cent gain for the average fund in the IA Global sector and a gain of 70.92 per cent for the MSCI World index. The fund has an ongoing charges figure (OCF) of 0.93 per cent.