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VT Gravis Clean Energy Income
This fund taps into the expertise of the Gravis group to create a portfolio of renewable energy and energy-efficiency related projects that are benefiting from the secular move to more sustainable energy demands. It looks to generate an attractive income, alongside modest capital growth, from a spread of different projects that should deliver defensive, uncorrelated performance.
Our opinion
Renewable energy is undergoing mass adoption – a trend which this fund taps into directly. It aims to capture a blended portfolio of the best listed vehicles across the developed market and give an anchor to portfolios through defensiveness and steady income. Gravis is an expert in this region and has a long-standing history of investing in this space, giving investors confidence in the long-term ability of the fund to deliver attractive, compound returns.
Company description
Gravis is a specialist infrastructure advisory firm, which was formed in 2008. The company manages in excess of £4 billion in a range of private, UCITs and closed-ended funds in the US, Australia, Europe & the UK. The Gravis team has worked together over many years and invests in the funds, so aligning its interests with those of its investors.
Fund manager
Valu-Trac (VT) is the investment manager of this fund, while Will Argent, who is employed by Gravis, is the fund advisor. Will makes the investment decisions and Valu-Trac executes the transactions.
Will joined Gravis in 2017, having spent 12 years working as an analyst within the private wealth management sector. His responsibilities have included the analysis and recommendation of direct equities and closed-end investment vehicles for client portfolios, setting asset allocation and strategy, and the management of open-ended funds. Will graduated with a degree in Mathematics from the University of Exeter and has passed all three levels of the CFA Program. He was awarded the CFA charter in 2009.
Will ArgentFund manager
Investment process
With VT Gravis Clean Energy Income, Will is looking for a portfolio of assets that derive energy from renewable, zero emissions sources, as well as companies saving energy through efficiency measures. This includes solar, wind and hydro-electric power, as well as energy storage, energy efficiency, bio-energy, geothermal, heat pumps and the smart grid.
The universe consists primarily of closed-ended investment companies and yieldcos, as well as other equities and fixed income instruments related to renewable energy and energy efficiency.
A yieldco is a company that is formed to own operating assets that produce a predictable cash flow, primarily through long term contracts. They are expected to pay a major portion of their earnings in dividends, and are commonly used in the energy industry to protect investors against regulatory changes.
Will has a process that focuses on future cash flows. He will look at the power output the stock can generate and at what cost. Next, he will look at the exposure of this power generation to market forces, such as the mix between fixed prices or market prices, and whether there is any embedded link to inflation.
He will also look at stocks within the context of the wider market, considering factors such as the level of new installation coming online, or any changes to potential subsidy regimes to understand how power prices are likely to change, and whether this will have any impact on the firm’s cash flow.
The primary focus of the process is to establish how well supported the dividends are by the underlying revenues, what would cause them to come under pressure, and in what environment they will be well supported.
The portfolio has a strong bias to developed markets. Will can invest in the whole of the OECD but specifically excludes China from this. The fund will likely have a large weight to the UK due to depth of market in closed-ended vehicles, and a strong structure of government subsidy regimes which support the asset class. There will also be considerable weights in the US & Canada, and the remainder from across Europe. There will be a mix between closed-ended vehicles like investment trusts, as well as some yieldcos which are similar in approach, but US based.
The portfolio will be quite concentrated on a headline level, with around 30-50 names, but there is considerable diversification through the underlying holdings to approximately 1500 projects, as each stock holding will have multiple projects and sites within it. The concentration of the portfolio is expected to fall as the universe expands. There is a minimum number of 22 holdings.
Whilst the target of the fund is to generate 4.5% per annum income, this may be lower in practice as the capital appreciates and lowers the initial yields.
ESG
ESG - Explicit
Gravis has a Responsible Investment Statement which Will adheres to when managing the fund. It has explicit ESG considerations and looks to create a material investing impact when allocating capital. This includes the avoidance of controversial activities such as armaments, alcohol, gambling and tobacco, though more specifically to the fund’s universe, the exclusion of involvement in coal-based activities and nuclear fuel, although the maintenance & services to nuclear facilities is allowable. This is monitored through the use of an external screening tool.
Will also looks at ESG issues throughout this analysis, identifying broad investment issues, as well as those specific to the industry. These include labour supply chains, the impact projects have on communities, as well as corruption and taxation policies. In the event Will does identify an issue with a company, Gravis will engage with them and expect resolutions within 12 months.
Risk
The fund is expected to offer defensive characteristics. The projects that are invested in are designed to be stable and deliver predictable returns. This means the fund is likely to underperform in a ‘risk-on’ market environment as investors chase more exciting stocks. However, the fund is likely to offer more protection in market sell-offs, as this defensiveness is rewarded. It also gives the comfort of a well-supported income stream.
Read more about this fund
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