Disclaimer: What you're about to read is of a general nature and doesn't take into account your personal financial situation, needs or objectives. We recommend you seek financial advice before making any decisions about your super and consider the relevant UniSuper product disclosure statement.
Lyndon: Hello, and welcome to Super Informed Radio, the official UniSuper podcast. I'm Lyndon.
Tania: And I'm Tania.
Lyndon: Well, Tania, it's a new year. We are still in the midst of a global pandemic, but one thing which hasn't changed recently is the continued strong performance of our environmentally, sustainably themed investment options here at UniSuper.
Tania: That's right, Lyndon. In fact, many listeners may have even heard our Chief Investment Officer, John Pearce, talking recently about our Global Environmental Opportunities investment option and the fact that it was our top-performing option across the entire fund. We know many of you out there are really interested in these kinds of issues, so for this episode, we thought we'd do a bit of a deep dive.
Lyndon: That is right, Tania. We are going to get to the bottom of how our investment team actually puts this investment option together, so what kinds of companies the option invests in—and, yes, we will be covering Tesla, one of our big holdings, so listen out for that—and of course, the question on everyone's mind, can this kind of performance that we're seeing be expected to continue? AKA, Tania, are we in bubble territory?
Tania: It would be good to know. So, to find out more, we've gone straight to the top on this one, Chief Investment Officer of UniSuper, John Pearce. Welcome to Super Informed Radio.
John: Hi, Tania.
Tania: So the Global Environmental Opportunities option, let's just call it GEO for short—could you give us a bit of an overview as a starting point what exactly is the option, how did it come about, and perhaps what are some of its distinguishing features?
John: Sure, Tania. We shorten it even further by calling it GEO. Now, as you've pointed out, we've got three ESG-themed options. For those listeners who aren't familiar with that term, ESG stands for environmental, social, and governance considerations. The other two options of course are Sustainable Balanced and Sustainable High Growth.
Now, we use the label "sustainable," but if you have a look in the market, you might also hear the labels "socially responsible" or "ethical" being mentioned. The differences between these sorts of labels are quite nuanced. And in fact, you'll find that the similarities are greater than the differences. One of the common characteristics you'll find is that they start by excluding certain companies or even whole sectors. So, for example, with our Sustainable options, we exclude fossil fuels, tobacco, alcohol, gambling, armaments. I'm sure these are all familiar to you. Having excluded those sectors, all other sectors are effectively included or permitted.
With GEO, we take a completely different approach. With GEO, the starting point is actively seeking companies that fit the thematic. And the thematic is the all-pervasive environmental thematic. So, we're looking for companies that not only are going to benefit from but are actually contributing to the environmental thematic. Another distinguishing feature that we should keep in mind is both GEO and Sustainable High Growth are 100% allocated to growth assets. So that makes them riskier than Sustainable Balanced which has 30% allocated to defensive assets. So, a bit of trivia for you—the Sustainable Balanced option was actually a cornerstone investor in Australia's first green bond.
Lyndon: Yeah, right. So how did the GEO option actually start?
John: GEO was introduced in 2012 at a time that we were looking to expand our product range to capture emerging themes. There are two things in particular that really stood out to us. The first was the emerging Asian middle-class, and our Global Companies in Asia option is really tailored to benefit from that thematic. Then of course we have what I broadly describe as the greening of the planet, and hence the introduction of Global Environment Opportunities.
Lyndon: And, John, I know you often talk about the fact that your team actually manages a lot of our investments in-house so, like, as opposed to outsourcing those kinds of functions to external managers. How much of the GEO option does your team actually manage in-house?
John: That's an easy one, Lyndon, 100%. Even with our Sustainable options, well over 90% of those options are managed in-house. So, it's a fantastic advantage for us. GEO, we're very fortunate to have someone...the calibre of Chris Line you will be interviewing, being the portfolio manager for that specific option, but Chris will be the first to admit that he's very well-supported by a large team of specialist analysts and indeed including our ESG team.
The in-house management not only has enabled us to deliver such strong performance, it is the reason why the fees that you're seeing on these products are far lower in many cases than comparable products you see in the market. So, when you can find that top performer with low fees, you're talking about a pretty compelling value proposition with our ESG-themed options.
Tania: Thanks, John. We really appreciate you speaking with us. We'd love to have you back on the podcast again sometime soon.
John: A pleasure, Tania, Lyndon.
Tania: We're going to dig a little deeper now. We've got Chris Line who works in John's team. He's an investment manager of Global Strategies and Quant Methods. In simple terms, he's our go-to person on the GEO option. Chris, welcome.
Chris: Thank you. Good to be here.
Tania: Let's start at the beginning. How long have you been involved with the Global Environmental Opportunities or GEO as we're calling it?
Chris: So, it would be over three and a half years that I've been involved with the management of Global Environmental Opportunities. For four and a half years, I have also been involved with the management of a sustainable global shares portfolio. And for over eight and a half years, I've been with UniSuper.
Lyndon: Yeah, right. So, you mentioned there that you've been involved, you know, with managing a portfolio of environmental shares. What is the actual process there though? Like, how do you actually go about constructing that portfolio?
Chris: Yeah. So Global Environmental Opportunities is a thematic portfolio and the environmental themes that it targets includes alternate energy, energy efficiency, pollution prevention, clean water, green building, sustainable agriculture. So, if you think about trying to identify companies whose business activity is aligned with those environmental themes, in a broader search, there's over 9,000 companies globally. It would be hard to cover all of that manually.
Tania: Absolutely, 9,000. How do you go about refining it? That must take a long time.
Chris: So that's why we use stock selection filters. We have a database and in-house tools to construct a model portfolio that's in the order of 100 stocks, around about there. That 100 stocks is a much more manageable number, and that's something we can get on top of. So, once we've got it down to 100, we have our sector specialists. We allocate stocks to our sector specialist for review and recommendation. We also have our ESG team which reviews the stocks from an environmental point of view. So ultimately, it's a team effort to construct a portfolio that's aligned with the environmental themes.
Lyndon: And so, do you recommend some stocks and then the ESG team kind of ticks them off from the environmental, social, and governance side or, like, what comes first? How does that work?
Chris: Well, actually, it's the ESG team who come first. They rule out any companies that may have passed our initial stock selection filter but, on closer inspection, they don't meet our standard. And because the ESG team plays a fundamental role, that's why they're engaged quite early in the process.
Lyndon: So, what kind of companies come out of that process? Like, I don't know, if a member is investing in the Global Environmental Opportunities option, what kind of companies are they investing in.
Chris: So as mentioned, we're targeting environmental themes, and you can see this if you look at our top holding. So, for example, Tesla, they make electric vehicles. SolarEdge and Enphase Energy, they're solar manufacturers particularly involved with inverters and optimizers. Digital Realty Trust, they have data centres. Samsung SDI, they make batteries. And Vestas, they produce wind turbines.
Tania: We'll come to Tesla in a bit. It's just noticeable that there's quite a lean towards electrification and energy transition in the names that you've just listed more so than some of the other themes that you've mentioned before. Could you give us a bit of info or insight into that?
Chris: You're absolutely right. Electrification and decarbonization of our economy is key to addressing climate change, and many of the companies that we hold in Global Environmental Opportunities, they're enabling the transition that we need to make as a society.
Tania: So, we mentioned earlier about the strong performance of our Sustainable options. And in particular, the GEO has been particularly strong. Could you tell us what's driven that performance?
Chris: There have been tailwinds behind the broader market. So, for Global Environmental Opportunities specifically perhaps there's a couple of things I'd point to. One is the positive developments in the political sphere, including proposals for green stimulus in Europe and the U.S. The U.S. election of the Biden administration and U.S. recommitment to the Paris climate change agreement, bans on internal combustion engines, say, in California by 2035, and similar proposals by Japan for 2035, and the UK in 2030. So certainly, there has been a welcome shift in the political dialog.
The other thing I would probably mention is an increased market awareness of the growth prospects in the green sector supported by improving economics and declining costs. I mean, consider some of the trends. On relevant metrics, wind power prices have halved over 10 years and more is expected. Solar power prices have halved in almost five years and more is expected. Batteries have more than halved in five years and more is expected. So those price declines, they're supporting new markets and opportunities. I mean, think about batteries in electric vehicles or batteries in grid-scale energy storage. Given the trends and the outlook, it's no surprise that the market is placing a value on the potential growth of the green sector.
Lyndon: Chris, with all of the podcasts that we have done, you know, we get that past performance isn't guaranteed to repeat and all the rest of it. But, you know, we're talking about some pretty strong performance here for people who are invested in the Global Environmental Opportunities option. So, we have to ask, of course, is this a bubble? Like, is there a correction on the cards given what we've been seeing?
Chris: Performance over the last year has been particularly strong, 49% up in 12 months to the end of January. It's an exceptional gain, and I can easily imagine some reversal, some short-term seller for correction. That would not surprise me at all. Having said that, emerging trends, be it solar power, wind power, batteries, electric vehicles, those trends are strong, and they should continue for the next decade and more. And so that gives me greater confidence in the long-term outlook. So, people should consider their investment time horizon and their tolerance for risk. The option is labelled as very high risk on our website, so consider your situation and speak to your financial advisor as appropriate.
Tania: I think that segues nicely into talking about Tesla. So, there is a lot of talk about Tesla and its high-profile CEO Elon Musk. It's performed really well. Could you tell us what we've done with Tesla?
Chris: We have sold some Tesla and taken profits. Also, the option has been in strong in-flow. And as Tesla's valuation has become more expensive, we have allocated away from the stock. Having said that, because of how quickly the share has increased in value, it's still a significant holding in the portfolio.
And so, you might ask, "Why not sell the rest?" And if you think about the long-term tailwinds, you can envisage a future that's dominated by electric vehicles. And by the way, that's just electric vehicles. Tesla is also looking at innovations in batteries and vehicle automation. If you're deliberately trying to get exposure to environmental themes such as electric vehicles in Tesla along with battery makers such as Samsung SDI, they remain some of the better and more pure-play ways to get exposure to those long-term trends.
Lyndon: So, from what you're talking about there, Chris, it seems pretty clear that these are pretty dominant themes over the next little while. And so there must be carmakers and manufacturers and all sorts of things all kind of jumping on these thematic bandwagons. Is that an issue if too many companies are competing? Like, surely not all of them are going to succeed.
Chris: Yes. Yeah, it can be. Absolutely. Industry structure is important. I mean, consider solar power, historically is a graveyard full of failed solar manufacturers. In this case, selecting where to invest is really important, and the value chain is long. With solar power, you've got at one end, polysilicon manufacturers. You've got the manufacturers of solar glass, solar cells, and modules. Inverters, optimizers. You've got the utilities that generate the solar power, the asset managers.
And if you think about that, maybe you think that investing in the solar cells or the modules, that might seem the obvious choice, but in that case, it's capital-intensive. There's a high rate of innovation, fierce competition, import tariffs. Instead of trying to tackle this area to date, we have instead tended towards the manufacturers of inverters and optimizers so names like SolarEdge, Enphase Energy. Here, there's a better industry structure and a greater likelihood that we're able to identify the number one or two companies that have the best prospect.
Tania: So, for listeners that have heard all this, they may be passionate about sustainable environmental investing, and thinking, "Well, I'm going to put all of my money into the GEO option”. You've mentioned that it's very high-risk. What should these members do?
Chris: That's right. Again, consider your risk tolerance. There are other options available. For example, John mentioned earlier our Sustainable High Growth and our Sustainable Balanced options. And both of these avoid fossil fuel production if that's important to you. Our website has more information on our approach to responsible investing. Certainly, consider your situation, speak with your financial advisor as appropriate.
Lyndon: Chris Line, thank you so much for your insights today. We really appreciate you coming in and joining us on Super Informed Radio.
Chris: Thank you.
Tania: And that just about wraps us up for this episode. If you're interested in getting more information on our investments, you can go to our website at unisuper.com.au/investments. There's information there about the 16 investment options that UniSuper has, including the Global Environmental Opportunities option which we've been discussing today, investment basics on how to get started with investments, and responsible sustainable investing.
Lyndon: And don't forget you can also dive into past investment updates and commentary with John Pearce, our chief investment officer who joined us at the top of the podcast. So, don't forget to check that out as well. We'll see you next time.
Tania: Bye for now.
This podcast is of a general nature. It doesn’t take into account your personal financial situation, needs or objectives. Before you make decisions about your super, we recommend you seek financial advice and consider the product disclosure statement that’s relevant to you. The past performance of the investment options we discuss isn’t indicative of their future performance, and by talking about certain companies, we’re not endorsing them for inclusion in your personal portfolios. To compare the fees and performance of the Global Environmental Opportunities option against our other investment options, visit unisuper.com.au/investments.