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8 Dec 2021 - Performance Report: 4D Global Infrastructure Fund
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| Fund Overview | The fund is managed as a single portfolio including regulated utilities in gas, electricity and water, transport infrastructure such as airports, ports, road and rail, as well as communication assets such as the towers and satellite sectors. The portfolio is intended to have exposure to both developed and emerging market opportunities, with country risk assessed internally before any investment is considered. The maximum absolute position of an individual stock is 7% of the fund. |
| Manager Comments | The 4D Global Infrastructure Fund has a track record of 5 years and 9 months and has outperformed the S&P Global Infrastructure TR Index (AUD) since inception in March 2016, providing investors with a return of 9.35%, compared with the index's return of 7.74% over the same time period. On a calendar basis the fund has had 1 negative annual return in the 5 years and 9 months since its inception. Its largest drawdown was -19.77% lasting 1 year and 9 months, occurring between February 2020 and November 2021 when the index fell by a maximum of -24.67%. The Manager has delivered these returns with -0.48% less volatility than the index, contributing to a Sharpe ratio which has fallen below 1 over five times and currently sits at 0.72 since inception. The fund has provided positive monthly returns 95% of the time in rising markets, and 14% of the time when the market was negative, contributing to an up capture ratio since inception of 105% and a down capture ratio of 94%. |
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8 Dec 2021 - 3 market myths that threaten to derail investors' long-term wealth
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3 market myths that threaten to derail investors' long-term wealth Montaka Global Investments November 2021 The US stock market recently hit fresh all-time highs. But then we learnt that US inflation in the month of October was 6.2%, the highest annual rate in 31 years. Many investors are naturally now fearing three 'facts' have emerged from the current situation: equities as an asset class are stretched and this is 'as good as it gets'; that likely interest rate rises will crunch stocks; and finally, that there are no undervalued stocks providing buying opportunities in the market today. But for strong, though perhaps counterintuitive, financial and economic reasons, these three fears are likely myths. We believe that equities continue to represent attractive, long-term value; structural deflationary forces will keep rates relatively low; and there are great companies available today at cheap prices. There is a danger that if investors fall for these myths they will bail out of equities and miss out on their long-term wealth-building potential. Myth 1: Equities are overvaluedWhile investors fear that equities are overvalued, the fact is that equities are better value than other asset classes. Investors are being paid unusually high returns for taking on equity risk compared with the likes of bonds. A good measure of the value of equities is the 'gap' between the equity risk premium (ERP) and the bond spread (how much corporate bonds yield above government bonds). The ERP is the extra return investors get for owning stocks, rather than risk-free government bonds. Historically, the gap between the ERP and bond spread has averaged around 2%. The gap has been as wide as 5% percent when equities were relatively cheap. It has also fallen close to zero when equities were expensive, such as during the 1999 tech bubble. (During this 20-year period of the gap closing, equities compounded at 18 percent per annum!) The 'Gap' between ERP and Corporate bond spread Source: NYU Stern (Damodaran); Bloomberg; Montaka Global The gap today is around 4%, so well above average. As equity prices have soared since the depths of the pandemic, the ERP has reduced. But spreads in other asset classes, such as bonds, have also reduced. On a relative basis, therefore, equities remain just as attractive as they did in 2019 when the S&P 500 was lower by one-third.
Myth 2: We have entered a structural inflationary cycleThe second fear is that interest rates will keep rising and slam the breaks on equities. But equity prices are actually more likely to keep rising in the long term. For the gap between the equity and bond spread to normalise from 4% today to the long-term average of 2%, equities must perform better than bonds going forward. Despite the current inflation worries, equity prices are more likely to rise because higher bond yields (resulting lower bond prices) are unsustainable, in our view. Strong, long-term, structural disinflationary forces will continue to pressure interest rates to much lower levels than we've observed historically. For a start, populations are aging across the world. The working-age cohort in major economies, such as China and Europe, are shrinking as more people retire, which will logically reduce economic growth over time. Governments will also have to ramp up spending on pensions and healthcare. That lower economic growth will push down interest rates. The soaring power of compute and big data is also creating of an increasing array of intelligent applications which require few, if any, humans to operate. Less demand for labour over time is disinflationary. US Federal public debt Global, non-financial corporate debt
Source: Bank of International Settlements; Federal Reserve Bank of St. Louis
And the huge debt loads of governments and corporates, which has surged post-pandemic, means interest rates cannot increase materially and sustainably. If rates do rise, consumers, corporates and governments will spend less - all at the same time - to meet higher interest costs, which in turn cuts economic growth and forces interest rates back down. So, notwithstanding short periods of slightly higher bond yields to reflect the economic cycle, a long-term regime of historically low interest rates appears likely. And if that is so, then the longer-term prospects for equities remain attractive.
Myth 3: It feels like most stocks are overvalued todayDespite the positive outlook for equities, some investors will still argue that many stocks are overvalued. But while that is true, a subset of stocks are materially undervalued, including Meta Platforms (formerly Facebook) and China's Tencent. Even if you only considered their existing core businesses, both Meta and Tencent are cheap. Based on 2022 earnings, the earnings yield of both Meta and Tencent's core business is around 4.5%. If you subtract a risk-free rate of, say, 1.5% you get a spread of 3.0%. Not so attractive, you might suggest. But by 2025, that same spread has increased to more than 6.0% due to earnings growing organically over this time. Compensation for taking risk - comparison Source: Bloomberg; Montaka Global estimates What's more, both Meta and Tencent have large, high-probability growth options tied to the 'metaverse', e-commerce, artificial intelligence and cloud computing. As these growth options are monetised, the 'spread' of the shares of these companies increases even further. On this basis, Meta and Tencent appear to be highly attractive investment opportunities. Hold the line on equitiesThe message to investors is to remain selective based on clear-minded, fact-based analysis. We continue to believe that equities offer materially better value than bonds, in general today. And this belief is based on detailed, 'first-principles' analysis. Of course, not all equity investments are created equal. Many stocks are overvalued today - but some are materially undervalued. If investors can patiently accumulate and own these undervalued businesses, it will steadily drive their compounding higher. And over the long-term, compounding in equities at rates of return well above those in cash or bonds, will lead to dramatically outsized wealth accumulation. Maintaining high exposure to equities is the key element to building wealth through investments. Don't fall for these 3 myths and give up on the remarkable long-term wealth building power of equities. Funds operated by this manager: |
7 Dec 2021 - Performance Report: DS Capital Growth Fund
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| Fund Overview | The investment team looks for industrial businesses that are simple to understand, generally avoiding large caps, pure mining, biotech and start-ups. They also look for: - Access to management; - Businesses with a competitive edge; - Profitable companies with good margins, organic growth prospects, strong market position and a track record of healthy dividend growth; - Sectors with structural advantage and barriers to entry; - 15% p.a. pre-tax compound return on each holding; and - A history of stable and predictable cash flows that DS Capital can understand and value. |
| Manager Comments | The DS Capital Growth Fund has a track record of 9 years and has consistently outperformed the ASX 200 Total Return Index since inception in January 2013, providing investors with a return of 16.29%, compared with the index's return of 9.55% over the same time period. On a calendar basis the fund has had 1 negative annual return in the 9 years since its inception. Its largest drawdown was -22.53% lasting 6 months, occurring between February 2020 and August 2020 when the index fell by a maximum of -26.75%. The Manager has delivered these returns with -2.29% less volatility than the index, contributing to a Sharpe ratio which has fallen below 1 twice and currently sits at 1.29 since inception. The fund has provided positive monthly returns 90% of the time in rising markets, and 37% of the time when the market was negative, contributing to an up capture ratio since inception of 73% and a down capture ratio of 45%. |
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7 Dec 2021 - Stocks Up; Bonds Flash Warning Signs
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Stocks Up; Bonds Flash Warning Signs Laureola Advisors 21 November 2021 The S&P 500 was up 6.9% for October with many companies reporting better earnings (or fewer losses) than expected, compounded by bouts of speculative fervor in some sectors. Valuations are stretched enough to convince even Morgan Stanley to advise investors to resist buying US stocks and Treasuries. But it was bond markets that gave the strongest signal of trouble ahead. Bond traders forced up yields essentially daring to fight the Fed and other Central Banks who claim that the current 5% to 6% inflation is transitory. The respected market analyst El-Erian was more articulate saying "It is going to go down in history as one of the worst inflation calls by the Federal Reserve". Yields on 2-year treasuries went from 0.27% to 0.50%. The auction of 30-year treasuries was the rockiest in a decade due to reduced liquidity in the world's most liquid market. The volatility created $1 bn of losses in the NY based macro fund Element Capital. Bond markets were volatile in Australia and Canada, and, in China, the country's largest developer saw its bond yields spike to 9.5% from 3.25% during October. Evidence of speculation, volatility, and price dislocation are increasing. No one can predict how the 13-year ZIRP and QE experiments will end, but it is unlikely to end quietly or happily. Investors seeking a safe refuge in these uncertain times are placing increasing value on the genuine stability and diversification offered by Life Settlements. LAST MONTH IN THE LIFE SETTLEMENT MARKETS - LS Markets Stable: Protests in Canada? Most would consider the phrase "Canadian protest" to be a contradiction in terms, but there are exceptions to every rule and this one has important lessons for Life Settlements. Ontario, Canada's most populous Province, does not currently allow an insured to settle his or her policy. Warren Horowitz, a Canadian gentleman confined to a wheelchair due to MS, would like to sell his life insurance policy to fund a better lifestyle and more care for himself as he could do in the USA. Despite the Canadian weather, he has staged a daily protest in the wheelchair outside of the legislature over the past three weeks to get a meeting with the Premier of Ontario. The Government's reaction has been to rescind his pass to use the handicap-accessible restroom in the building, and the next closest one is 40 minutes away. The proposed legislation is stalled. Coincidentally, the Ontario Minister of Finance overseeing the legislation used to be a senior executive of a leading Canadian Insurance company. Some investors struggle with Life Settlement's connection to mortality; they may want to contemplate the case of Mr. Horowitz. LS investors are prepared to purchase the policy well above surrender value, provide liquidity when the insured needs it, and be part of the solution for a better life for the insured; LS investors are not the bad guys. It is other parties who are acting against the best interests of the insured. Written By Tony Bremness Funds operated by this manager: |
6 Dec 2021 - Performance Report: AIM Global High Conviction Fund
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| Fund Overview | AIM are 'business-first' rather than 'security-first' investors, and see themselves as part owners of the businesses they invest in. AIM look for the following characteristics in the businesses they want to own: - Strong competitive advantages that enable consistently high returns on capital throughout an economic cycle, combined with the ability to reinvest surplus capital at high marginal returns. - A proven ability to generate and grow cash flows, rather than accounting based earnings. - A strong balance sheet and sensible capital structure to reduce the risk of failure when the economic cycle ends or an unexpected crisis occurs. - Honest and shareholder-aligned management teams that understand the principles behind value creation and have a proven track record of capital allocation. They look to buy businesses that meet these criteria at attractive valuations, and then intend to hold them for long periods of time. AIM intend to own between 15 and 25 businesses at any given point. They do not seek to generate returns by constantly having to trade in and out of businesses. Instead, they believe the Fund's long-term return will approximate the underlying economics of the businesses they own. They are bottom-up, fundamental investors. They are cognizant of macro-economic conditions and geo-political risks, however, they do not construct the Fund to take advantage of such events. AIM intend for the portfolio to be between 90% and 100% invested in equities. AIM do not engage in shorting, nor do they use leverage to enhance returns. The Fund's investable universe is global, and AIM look for businesses that have a market capitalisation of at least $7.5bn to guarantee sufficient liquidity to investors. |
| Manager Comments | The AIM Global High Conviction Fund has a track record of 2 years and 4 months and therefore comparison over all market conditions and against the fund's peers is limited. However, since inception in July 2019, the fund has outperformed the Global Equity Index, providing investors with an annualised return of 19.44%, compared with the index's return of 15.71% over the same time period. On a calendar basis the fund has never had a negative annual return in the 2 years and 4 months since its inception. Its largest drawdown was -7.59% lasting 6 months, occurring between February 2020 and August 2020. The Manager has delivered higher returns but with higher volatility than the index, resulting in a Sharpe ratio which has never fallen below 1 and currently sits at 1.69 since inception. The fund has provided positive monthly returns 90% of the time in rising markets, and 0% of the time when the market was negative, contributing to an up capture ratio since inception of 110% and a down capture ratio of 83%. |
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6 Dec 2021 - Manager Insights | Cyan Investment Management
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Chris Gosselin, CEO of FundMonitors.com, speaks with Dean Fergie, Director & Portfolio Manager at Cyan Investment Management. The Cyan C3G Fund has a track record of 7 years and 3 months and has outperformed the ASX Small Ordinaries Total Return Index since inception in August 2014, providing investors with a return of 16.15%, compared with the index's return of 9.63% over the same time period.The fund has provided positive monthly returns 85% of the time in rising markets, and 42% of the time when the market was negative, contributing to an up capture ratio since inception of 68% and a down capture ratio of 48%.
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6 Dec 2021 - Global infrastructure and global real estate set to shine
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Global infrastructure and global real estate set to shine 4D Infrastructure and Quay Global Investors 17 November 2021 |
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4D Infrastructure chief investment officer, Sarah Shaw, says inflation will be a key issue in this market but there is also great opportunity presented by the huge global infrastructure investment plans as part of stimulus programs taking place globally in the wake of COVID-19, as well as decarbonisation and its implications for infrastructure investment. "The huge global fiscal stimulus measures initiated during the COVID pandemic, combined with very accommodative Central Bank monetary policy, has led to a surge in global GDP growth. "The key risk to this story is of course inflation, and the current debate revolves around whether inflation is 'transitory' or not. However, whether inflation is transitory or more of a problem than we currently anticipate, infrastructure is still the place to be. Many infrastructure stocks have built-in inflation protection, either directly linked to tariffs or indirectly through their regulatory construct. Essentially, infrastructure, and in particular the 'user pay' sub-sector of infrastructure, is where you want to be invested in an inflationary environment. "But a far more exciting issue for us at present, as it will ultimately have a significant impact on the shape of our asset class, is that the global economy is poised to ramp up infrastructure spending. "The US Senate passed a US$1.2 trillion infrastructure plan (US$550 billion in new federal investment) that will represent the biggest burst of spending on US public works in decades. Similarly, India will launch a 100 trillion rupee (US$1.35 trillion) national infrastructure plan that will help generate jobs and expand use of cleaner fuels to achieve the country's climate goals. The EU has also announced significant infrastructure investment plans, while the May 2021 Australian Federal Budget saw the Commonwealth Treasurer identify an additional A$15.2 billion investment over 10 years on major infrastructure projects, and kept the 10-year plan at A$110 billion. "IMF research has shown this type of infrastructure spending has a real 'multiplier' effect when it comes to job creation and economic growth." Ms Shaw says the other key global area of focus is climate change and decarbonisation. "Simply put, the world cannot achieve Net Zero carbon by 2050 unless there is a huge investment in the infrastructure solution. Decarbonisation only enhances the infrastructure investment opportunity. "While the speed of ultimate decarbonisation remains unclear, there appears to be a real opportunity for multi-decade investment as every country moves towards a cleaner environment. Energy transition and decarbonisation of the power sector is an obvious thematic, and will have the greatest impact on countries looking for Net Zero. However, other forms of infrastructure, namely transportation, also have a key role to play," she says. Quay Global Investors principal and portfolio manager, Chris Bedingfield, agrees the past 18 months in markets have been challenging, but that government policy settings globally also provide some good opportunities. "While there are pockets of overvaluation in the global real estate market, there are also tremendous pockets of deep value and opportunity. "Global real estate has had a good run over the past 12 months and is up nearly 40 per cent in that time. Demand has come rushing back very quickly in terms of the stimulus that was put in consumers' hands over many months, and we've seen that in logistics, self-storage and retail - really right across the board. "In terms of where we see opportunities, one of the results of COVID-19 has been a renewed interest in some global real estate sectors that many had written off. "Take bricks and mortar retail as an example. You couldn't get investors interested in shopping centres before COVID-19. Most people were death writing the whole industry thinking that ecommerce was going to take over the whole world. "But what we've seen in the United States is a resurgence in bricks and mortar retail. The largest retail landlord in the world, Simon Property Group, just reported its third quarter sales performance - and the sales from the third quarter are higher in 2021 versus 2019 by roughly 7-8 per cent. And that is despite the fact that in the US they had rolling shutdowns. "We were starting to see the same sort of trend here in Australia with Scentre Group until the Delta strain came. So we fully expect consumers to come roaring back - not only in terms of ecommerce sales, but bricks and mortar sales as well. "We see that as an incredibly good opportunity," Mr Bedingfield says. Bennelong Funds Management CEO, Craig Bingham, adds that some of the euphoric behaviour we are seeing in global investment markets at the moment is not likely to be sustainable. "It's important to focus on investors' needs for the future. We know that history does tend to repeat itself, and it pays to bring a healthy dose of scepticism to the table when it comes to the outcome for global markets. "We've seen a lot of digital businesses evolving and coming to the fore with valuations that defy gravity. But we know we need real assets such as roads, bridges, airports, railways and real property - we can't ignore the opportunities that exist in infrastructure and real estate. "Six years ago we took the decision that our clients needed exposure to global opportunities such as listed infrastructure and listed real estate, and it was a decision that has paid off. Quay and 4D have produced some stellar numbers and have had some good results. They are showing some great momentum because they are investing today for investors' needs into the future," says Mr Bingham. |
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Funds operated by this manager: Quay Global Real Estate Fund, 4D Emerging Markets Infrastructure Fund, 4D Global Infrastructure Fund |
3 Dec 2021 - Hedge Clippings | 03 December 2021
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3 Dec 2021 - Green hydrogen is central to plans to achieve net zero
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Green hydrogen is central to plans to achieve net zero Magellan Asset Management November 2021 The US has launched a 'hydrogen shot' known as '111' for one dollar for one kilo in one decade.[1] The UK intends to be the "Qatar of hydrogen".[2] Japan wants to be a "hydrogen society".[3] China, with 53 projects underway, is a "potential hydrogen giant" in a world where more than 350 hydrogen projects are proceeding as US$500 billion is invested by 2030.[4] Australia's government is investing A$1.2 billion to fulfil a national hydrogen strategy,[5] announcing A$275 million in its latest budget to create four 'hydrogen hubs' to generate producer economies of scale.[6] New South Wales is dangling A$3 billion in incentives to encourage A$80 billion of investment to make the state an "energy and economic superpower".[7]
Similar promises gush from Canada, the EU, France, Germany, the Netherlands and South Korea to total at least 50 worldwide,[8] while Queensland could soon be the site of the world's largest 'green' hydrogen plant. Fortescue Future Industries says it will spend A$114 million initially, and possibly more than A$1 billion in time, to build the world's largest electrolyser facility that through the process known as electrolysis would double the world's green hydrogen production capacity.[9] "Green hydrogen can save us," Fortescue proclaims.[10] Green hydrogen is certainly central in the drive to net-zero emissions because electrolysers that split water into its two elements of hydrogen and oxygen produce energy that is emissions-free; the only by-product is water vapour when it's used as a fuel. As well as being a clean fuel that burns to high temperatures, green hydrogen is an energy carrier and an input ('feedstock') for synthetic fuels. The combustible element is light and energy dense by weight (2.6 times more energy than natural gas per kilo). It can be stored and transported.[11] Hydrogen might be the most plentiful element in the solar system but it is only found in nature as a compound. That can be in gas, liquid or solid form. The element must be extracted; this is to say, manufactured. 'Green', 'renewable' or 'clean' hydrogen means the element was extracted from compounds using renewable power. The 'green' distinguishes these clean molecules from cleanish 'blue' hydrogen and dirty 'brown' hydrogen.[12] Brown hydrogen is derived when CO2-polluting fossil fuels react with steam during a simpler and cheaper extraction process called steam methane reformation. (It's called 'grey' hydrogen when natural gas, usually methane, is used.)[13] Almost all the hydrogen produced today is dirty hydrogen, which has found niche use for decades in oil refining and to produce ammonia for explosives and fertiliser.[14] Blue hydrogen is hydrogen obtained using fossil fuels, typically natural gas, where the carbon produced is captured and stored to make it a low-emissions energy source. According to the global industry body, the Hydrogen Council, announced clean hydrogen production capacity will boost clean hydrogen production to 11 million tons by 2030. If achieved, that would be an increase of 450% on 2019 levels and compares with (almost all dirty) hydrogen production today of about 70 million tons. About 70% of the flagged production by 2030 would be green hydrogen, while the other 30% would be blue. While most of the hydrogen produced today is used near where it's made, by 2030 about 30% of the hydrogen produced is expected to be transported via ships or pipelines.[15] Like fossil fuels, hydrogen (when combined with a fuel cell, the reverse process of electrolysis) can be combusted for industrial and household use and in stationary and mobile applications, including as hydrogen-power cells for electric cars, and is especially suited, advocates say, for heavier transport such as planes, rockets, ships and trucks. Hydrogen, first used to propel the earliest internal combustion engines 200 years ago is poised to help the world fight climate change for two main reasons. One is that clean hydrogen helps to overcome the biggest disadvantage of renewable energy. Solar and wind power are unreliable because they rely on intermittent sources of energy. Hydrogen can make renewable grids reliable because it is easily stored as an energy source and dispatched when needed. The other advantage of hydrogen is that it can replace fossil fuels used in manufacturing where furnaces need to reach 1,500 degrees Celsius. That hydrogen can replace the fossil fuels blamed for 20% of global carbon dioxide emissions means the element is the 'missing link' in decarbonising the 'hard-to-abate' areas of manufacturing, where electricity is not suited to generating the heat required. Such industries include agriculture, aviation, chemical manufacturing and steel making. Another benefit of hydrogen is strategic. A report in 2020 from Harvard University's Belfer Center judged the countries best placed to dominate renewable hydrogen will be those with the infrastructure in place and lots of accessible fresh water - nine litres of water is needed to produce one kilo of renewable hydrogen. It so happens that liberal democracies such as Australia, Norway and the US are hydrogen friendly. This means western powers will be less reliant on authoritarian states such as Russia and Saudi Arabia that are the world's biggest exporters of fossil fuels. "The reshuffling of power could significantly boost stability throughout global energy markets," the report says. [16] What's not to like about hydrogen? The element's big drawback is that it is more costly than dirty alternatives because it is expensive to manufacture. As a general rule, renewable hydrogen is about two to three times more costly to produce than fossil-fuel-based hydrogen.[17] In the EU context, green hydrogen costs from 2.5 to 5.5 euros a kilo versus 1.5 euros a kilo for brown hydrogen and 2 euros a kilo for blue.[18] In the Australian context, the cost of green hydrogen needs to plunge from an estimated A$8.75 a kilo now to below A$2 a kilo to be as cheap as fossil fuels. For the US to achieve its 111 shot, the cost of clean hydrogen must plummet by 80% from US$5 a kilo. Reducing the cost is the defining challenge of green hydrogen - that the cost of solar photovoltaics plunged 82% from 2010 to 2019 provides much encouragement.[19] The hydrogen industry will likewise triumph if, first, electrolysers become cheaper due to technological advances and economies of scale, second if renewable power becomes more affordable, and third if hydrogen producers can achieve economies of scale. Governments, for their part, need to offer subsidies that encourage demand and supply. Another option is they could make clean energies more price competitive by legislating a tax on carbon. While the intractable politics of climate change prevent the implementation of adequate carbon taxes, governments are providing the catalyst to engender the required economies of scale. Bloomberg New Energy Forum forecasts green hydrogen's cost could drop to US$2 a kilo by 2030 and US$1 a kilo by 2050 by when the element could supply up to 24% of the world's energy needs.[20] A world looms where clean hydrogen might play a defining role in helping the drive to net-zero emissions. The split between green and blue will depend on reducing the cost of green. To be sure, the electrolysis performed to create green hydrogen comes with the environmental challenge that it removes water supplies from where the hydrogen is produced. Doubts surrounding carbon capture and storage undermine blue hydrogen's environmental credentials. Some dismiss it as a natural-gas company marketing ploy like 'clean coal' - a recent Cornell and Stanford study says blue hydrogen is "difficult to justify on climate grounds".[21] Hydrogen, being the lightest gas in the universe, is not dense by volume. This means it must be pressurised to pipe or liquified to ship, which adds to costs. Hydrogen is volatile and can explode. The petro-states and China could prove influential enough in hydrogen and thus negate the element's strategic benefits for the west. Batteries are likely to hold their cost advantage over hydrogen fuel cells for powering electric cars. Solutions other than hydrogen (such as better battery storage, interconnected grids and smart-grid technology) could overcome the intermittent handicap of renewable power. Beware too that two decades ago, hydrogen was touted as an energy solution. George W Bush in the 2003 State of the Union, for instance, set aside US$1.2 billion so the first car driven by a child born that year would be powered by hydrogen.[22] Yet 18 years later, the green hydrogen industry still barely exists. But that's a reason for optimism. The push to derive the economies of scale needed to lower the price of hydrogen have barely started. Yet electrolyser costs have dived by around 60% over the past 10 years, and the coming economies of scale are expected to lead to a further halving by 2030, according to the financial-sector-backed Sustainable Markets Initiative, which expects green hydrogen to be price competitive against fossil-fuel-based hydrogen by 2030.[23] If so, the countries hyping the element are likely to fulfil their hopes for an element that today shapes as a key technological pathway to net-zero emissions. Political shortfall President Joe Biden, to emphasise the priority he placed on climate change, announced the US would rejoin the Paris Agreement on his first day in office.[24] One week later on January 27, Biden took "aggressive" executive actions "to tackle the climate crisis" that included a writ that climate considerations be an "essential element" of US foreign policy.[25] In April, Biden committed the US to slashing emissions by 50% by 2030 from 2005 levels because climate change posed an "existential threat".[26] Yet in August, the White House demanded Opec boost oil production because high petrol prices "risk harming the ongoing global recovery".[27] While on his way from Italy to the UN climate change conference of world leaders in the UK in October, Biden admitted the situation "seems like an irony".[28] Rather than ironic, Biden's actions are incompatible. But that's understandable, especially for a president whose climate-change steps have been hobbled by a Congress under his party's control. The political resistance against tackling climate action has proved intractable for decades for three broad reasons. The central political problem is that steps to lower emissions impose immediate costs and there are limits to what people will stomach. Economists (among others) argue the best way to reduce carbon emissions is to tax carbon. The IMF says carbon taxes need to rise from its estimate of US$3 a ton now to US$75 a ton by 2030 to reduce emissions as targeted.[29] But taxes are unpopular, especially among the working class, as the 'gilets jaunes' protests over higher oil and fuel prices in France from 2018 to 2020 showed. Carbon taxes are regressive because the poorer spend a greater proportion of their incomes on energy. The taxes cost jobs in targeted industries. They hurt the countries and communities dependent on these energies. They promote a general rise in prices that has flow-on effects for interest rates. A World Bank tracker highlights the world's failure to impose taxes on carbon. The gauge shows that installed or coming carbon taxes cover only 21.5% of global emissions.[30] These taxes are generally set too low to make much difference anyway. Some say the effective price of carbon emissions across the world is essentially zero.[31] As there's little sign that will change, policymakers must resort to regulatory actions, subsidies and possibly carbon tariffs on imports to change behaviours - and they come with political blowback too. The second challenge is the 'free rider' problem. If most countries take action to reduce emissions, there is less incentive for the reluctant to do so. (The other way to view this difficulty is as the first-mover disadvantage.) The third is the sequencing problem. Emerging countries protest they are being asked to forgo prosperity to mitigate the damage caused when advanced countries became rich on cheap fossil fuels. Emerging leaders sabotaged the UN climate conference in Copenhagen in 2009 for this reason.[32] The thorny politics explain why policymakers invest so much hope in technology. This is the context in which to view the promise of hydrogen. Bloomberg New Energy Group says seven indicators will determine whether or not a hydrogen economy emerges. The first is that countries legislate net-zero climate targets to force hard-to-abate industries to decarbonise. The second is that standards governing hydrogen use are harmonised and regulatory barriers removed, to reduce obstacles for hydrogen projects. Three, targets with investment mechanisms are needed to provide a motive for investment. Four, harsh heavy transport emission standards must to be set to promote a shift towards hydrogen as a fuel. Five, mandates and markets for low-emission products be formed. Six, industrial decarbonisation policies and incentives are established. Last, hydrogen-ready equipment becomes commonplace, which enables and reduces the cost of switching to hydrogen.[33] Meeting 24% of energy demand with hydrogen in a 1.5 degree Celsius scenario will require huge amounts of additional renewable electricity generation. In this scenario, about 31,320 terawatts of electricity would be needed to power electrolysers - more than is produced worldwide nowadays from all sources, the group says. Add to this the projected needs of the power sector - where renewables are also likely to expand massively if deep emission targets are to be met - and total renewable energy generation excluding hydro would need to top 60,000 terawatts compared with less than 3,000 terawatts in 2020.[34] Even amid such production challenges, hydrogen's biggest barrier is price. Some of hydrogen's biggest supporters admit to doubts about overcoming hydrogen's cost disadvantage. Former Australian chief scientist Alan Finkel, who forecasts Australia will be the world's biggest hydrogen exporter, says "in practice the future costs of both green and blue hydrogen remain unknown".[35] There are, however, plenty of optimists. A study by INET Oxford released in September found most energy-economy models underestimate deployment rates for renewable energy technologies and overegg their costs. The study suggests that if batteries, solar, wind and hydrogen electrolysers match recent exponential growth for another decade, the world will attain a "near-net-zero emissions energy system within 25 years".[36] Marco Alverà, the CEO of Italy's energy-infrastructure giant Snam and the author of The Hydrogen Revolution, is another optimist. Green hydrogen priced at US$5 a kilo or US$125 a megawatt-hour compares with about US$40 a megawatt-hour for oil and about US$60 a megawatt-hour for natural gas in Europe, he notes. "What's needed to get us from the current US$5 a kilo to US$2 or even US$1? The answer is that we need to make more of it," Alverà says. "The potential economies of scale are staggering: just 25 gigawatts of electrolyser production capacity - globally - could bring the cost of hydrogen to US$2 a kilo when combined with cheap renewable power."[37] Another cause for optimism is that nuclear energy, a reliable emissions-free source of power, is suited to power the electrolysis process that makes green hydrogen. The nuclear industry in the UK reckons it can produce 33% of the country's clean hydrogen needs by 2050.[38] Oil and gas companies moving away from fossil fuels are another possible driver of the hydrogen economy. The US's 111 strategy will no doubt be successful if it is read as one dollar one kilo one day. And there's a good chance the day when such technological advances overcome the political failures to mitigate climate change will be soon enough. Written By Michael Collins, Investment Specialist |
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Funds operated by this manager: Magellan Global Fund (Hedged), Magellan Global Fund (Open Class Units) ASX:MGOC, Magellan High Conviction Fund, Magellan Infrastructure Fund, Magellan Infrastructure Fund (Unhedged), MFG Core Infrastructure Fund [1] US Department of Energy. Hydrogen. energy.gov/eere/fuelcells/hydrogen-shot [2] UK government. 'PM speech at the Global Investment Summit: 19 October 2021.' gov.uk/government/speeches/pm-speech-at-the-global-investment-summit-19-october-2021 [3] Japanese government. 'Creating a hydrogen society to protect the global environment.' 2017. japan.go.jp/tomodachi/2017/spring-summer2017/creating_a_hydrogen_society.html [4] Hydrogen Council and McKinsey & Company. 'Hydrogen insights. An updated perspective on hydrogen investment, market development and momentum in China.' July 2021. Page 3. hydrogencouncil.com/wp-content/uploads/2021/07/Hydrogen-Insights-July-2021-Executive-summary.pdf [5] Australian government. 'Growing Australia's hydrogen industry.' Undated. industry.gov.au/policies-and-initiatives/growing-australias-hydrogen-industry [6] Speech by Angus Taylor, minister for industry, energy and emissions reduction. 'Keynote address at the 2021 Australian hydrogen conference.' 26 May 2021. minister.industry.gov.au/ministers/taylor/speeches/keynote-address-2021-australian-hydrogen-conference [7] NSW government. 'NSW hydrogen strategy to drive investment, create jobs and power prosperity.' 13 October 2021. nsw.gov.au/media-releases/nsw-hydrogen-strategy-to-drive-investment-create-jobs-and-power-prosperity [8] International Energy Agency. 'The future of hydrogen.' June 2019. [9] 'Regional workers the winners as Fortescue Future Industries announced Global Green Energy Manufacturing Centre for Queensland.' 10 October 2021. com.au/news/regional-workers-the-winners-as-fortescue-future-industries-announces-global-green-energy-manufacturing-centre-in-queensland/ [10] ffi.com.au/. As at 28 October 2021 [11] Technically, hydrogen purrs. The electrochemical reaction between hydrogen in fuel cells and oxygen drawn from the air generates electricity more efficiently than does conventional thermal generation (where the chemical energy of fuels becomes thermal energy that turns turbines to create electricity). [12] 'Pink' hydrogen is hydrogen made from nuclear, 'turquoise' if it is made using electricity to heat methane whereas blue and grey hydrogen are made from methane via the combustion of fossil fuels. [13] Dirty hydrogen is often called 'black' hydrogen when it's derived from coal. [14] NSW government. 'NSW hydrogen strategy.' October 2021. Page 15. Ammonia is made by combining hydrogen with nitrogen. nsw.gov.au/sites/default/files/2021-10/GOVP1334_DPIE_NSW_Hydrogen_strategy_FA3%5B2%5D_0.pdf [15] Hydrogen Council et al. Op cit. Page 4. Total world production figure from the International Energy Association op cit. [16] Fridolin Pflugmann and Nicola De Blasio. Belfer Center for Science and International Affairs. Harvard Kennedy School. 'Geopolitical and market implications of renewable hydrogen.' March 2021. Page 35. belfercenter.org/sites/default/files/files/publication/Geopolitical%20and%20Market%20Implications%20of%20Renewable%20Hydrogen.pdf [17] Pflugmann and De Blasio. Op cit. Page 10 [18] Sustainable Markets Initiative. 'Energy Transition. Briefing Note.' Page 9. a.storyblok.com/f/109506/x/043fbf2a45/lseg-smi-energy-transition.pdf [19] International Renewable Energy Agency. 'How falling costs make renewables a cost-effective investment.' 2 June 2020. irena.org/newsroom/articles/2020/Jun/How-Falling-Costs-Make-Renewables-a-Cost-effective-Investment [20] Bloomberg New Energy Forum. 'Hydrogen economy outlook.' 30 March 2020. For forecast price drop, see figure 3 on page 3. For world energy needs forecast, see page 8. data.bloomberglp.com/professional/sites/24/BNEF-Hydrogen-Economy-Outlook-Key-Messages-30-Mar-2020.pdf [21] Robert Howarth and Mark Jacobson. 'How green is blue hydrogen?' Energy Science & Engineering. 12 August 2021. onlinelibrary.wiley.com/doi/10.1002/ese3.956. See also 'Fossil fuel companies say hydrogen made from natural gas is a climate solution. But the tech may not be very green.' TIME. 22 September 2021. time.com/6098910/blue-hydrogen-emissions/ [22] George W. Bush. 'Transcript of State of the Union.' 2003. cnn.com/2003/ALLPOLITICS/01/28/sotu.transcript.5/index.html [23] Sustainable Markets Initiative. Op cit. Page 9. [24] The White House. 'Paris climate agreement.' 20 January 2021. whitehouse.gov/briefing-room/statements-releases/2021/01/20/paris-climate-agreement/ [25] The White House. 'Fact sheet: President Biden takes executive actions to tackle the climate crisis at home and abroad, create jobs, and restore scientific integrity across federal government.' 27 January 2021. whitehouse.gov/briefing-room/statements-releases/2021/01/27/fact-sheet-president-biden-takes-executive-actions-to-tackle-the-climate-crisis-at-home-and-abroad-create-jobs-and-restore-scientific-integrity-across-federal-government/ [26] The White House. 'Fact sheet: President Biden sets 2030 greenhouse gas pollution reduction target aimed at creating good-paying union jobs and securing US leadership on clean energy technologies.' 22 April 2021. whitehouse.gov/briefing-room/statements-releases/2021/04/22/fact-sheet-president-biden-sets-2030-greenhouse-gas-pollution-reduction-target-aimed-at-creating-good-paying-union-jobs-and-securing-u-s-leadership-on-clean-energy-technologies/ [27] The White House. 'Statement by National Security Advisor Jake Sullivan on the need for reliable and stable global energy markets.' 11 August 2021. whitehouse.gov/briefing-room/statements-releases/2021/08/11/statement-by-national-security-advisor-jake-sullivan-on-the-need-for-reliable-and-stable-global-energy-markets/ [28] The White House. 'Remarks by President Biden in press conference.' 31 October 2021. Rome, Italy. whitehouse.gov/briefing-room/speeches-remarks/2021/10/31/remarks-by-president-biden-at-press-conference-in-rome-italy/ [29] IMFBlog. 'A proposal to scale up global carbon pricing.' 18 June 2021. blogs.imf.org/2021/06/18/a-proposal-to-scale-up-global-carbon-pricing/ [30] The World Bank. 'Global carbon dashboard.' carbonpricingdashboard.worldbank.org/ [31] Foreign Affairs. 'Why climate policy has failed.' 12 October 2021. foreignaffairs.com/articles/world/2021-10-12/why-climate-policy-has-failed [32] Andrew Charlton, economic adviser to Australian prime minister Kevin Rudd. 'I hate to say it, but Barnaby has a point on climate.' 29 October 2021. smh.com.au/environment/climate-change/i-hate-to-say-it-but-barnaby-has-a-point-on-climate-20211028-p593uu.html. A fourth challenge might be the 'not in my backyard' syndrome that hobbles the building of renewable energy plants including nuclear ones due to their visual pollution, damage to the natural environment and perceived risks. [33] Bloomberg New Energy Forum. Op cit. Page 10 [34] Bloomberg New Energy Forum. Op cit. Pages 8 and 9 [35] Alan Finkel. Australia's chief scientist from 2016 to 2020 and special adviser to the Australian government on low-emissions technology. 'Green or blue, our future with hydrogen is bright.' The Sydney Morning Herald. 15 October 2021. smh.com.au/environment/climate-change/blue-or-green-our-future-with-hydrogen-is-bright-20211014-p58zug.html [36] Institute for New Economic Thinking (INET) at the Oxford Martin School. Rupert Way et al. 'Empirically grounded technology forecasts and the energy transition.' 14 September 2021. inet.ox.ac.uk/files/energy_transition_paper-INET-working-paper.pdf [37] Marco Alverà, the CEO of Italy's grid operator Snam. 'The main obstacle to hydrogen becoming the green fuel of the future is cost - but maybe not for long.' 19 September 2021. The Independent. independent.co.uk/climate-change/opinion/hydrogen-green-fossil-fuels-electricity-b1921520.html [38] Nuclear Industry Association. Media release. 'Government and industry back nuclear for green hydrogen future.' 18 February 2021. niauk.org/media-centre/press-releases/government-industry-back-nuclear-green-hydrogen-future/ Important Information: This material has been delivered to you by Magellan Asset Management Limited ABN 31 120 593 946 AFS Licence No. 304 301 ('Magellan') and has been prepared for general information purposes only and must not be construed as investment advice or as an investment recommendation. This material does not take into account your investment objectives, financial situation or particular needs. This material does not constitute an offer or inducement to engage in an investment activity nor does it form part of any offer documentation, offer or invitation to purchase, sell or subscribe for interests in any type of investment product or service. You should read and consider any relevant offer documentation applicable to any investment product or service and consider obtaining professional investment advice tailored to your specific circumstances before making any investment decision. A copy of the relevant PDS relating to a Magellan financial product or service may be obtained by calling +61 2 9235 4888 or by visiting www.magellangroup.com.au. 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2 Dec 2021 - Managers Insights | Equitable Investors
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Chris Gosselin, CEO of FundMonitors.com, speaks with Martin Pretty, Director at Equitable Investors. The Equitable Investors Dragonfly Fund has been operating since September 2017. Over the past 12 months, the fund has returned +45.96%, outperforming the index by +18%, which returned +27.96%.
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