Panelists: Mr. Jens Ullveit-Moe, owner/CEO UMOE
Dr. Magne Orgland, owner/CEO Norga Capital
Discussion Leader: Dr. Peter Lorange
Additional questions from the audience: Per F. Lorange
1) Where do you find attractive investments and what is your process of finding such?
A good understanding of key macro-issues is of course essential (expected growth – where and in which industries; pertinent governmental regulations, say, regarding emissions/pollution etc.). Beyond this, one should always try to look at what might be “hot opportunities” at the moment. But here it is important not to over-invest, rather to look down the road at the future expected supply/demand balance as chances are the opportunity could become an over-investment. As an example, investments in solar panels were seen as a very attractive opportunity a few years ago, but excessive new capacity was added with high pace, from China, and this market collapsed. A similar scenario might come about when it comes to vaccines against the COVID-19 virus.
Some firms in certain industries are held out as very attractive these days, notably those in the high-tech industry, several pharmaceuticals, etc., fueled by the abundance of inexpensive liquidity. However, a large number of firms are doing quite unexceptionally, in contrast, none-the-least as a consequence of the current pandemic. Careful analysis might however lead to interesting unearthing of attractive opportunities here. As an example, within the restaurant business, the fast food segment, i.e. at the low end and with the take-out segment, in particular, seems to be relatively interesting. Sit-down restaurants, particularly higher-end ones, are however doing badly. Hotels, airlines and the cruise industry might be added to the unattractive segment: people meeting physically; relatively expensive, …
To find so-called disruptive companies seems critical. One’s own personal interests come in here, i.e. limiting the range of potential investment candidates to look for interactions with others, such as smart investors, is also key. Openness is a must! Although it is not simple, especially when there are multiple value traps in the market, it is advisable to invest in the disruptor side with a buy-side orientation, follow smart fund managers and read a lot!
2) Where can we find so-called “green” investments, those which contribute to minimizing pollutions, and perhaps also attract governmental regulatory attention?
The cost-volume relationship seems of meaningful importance here. As volume goes up, costs tend to drop significantly in many industries. Electric cars, such as Tesla, are coming down in price. And, solar and wind generated electric power is already cheaper than new coal fired or atomic electric plants. The cost of storage, battery technology, in particular, is also coming down (some say with 20% p.a.), thus making solar or wind generated energy further attractive. Further, various services that feed into this emerging picture of electricity supply may clearly represent attractive investment possibilities.
We are likely to see a rather dramatic shift in the way we might “experience” energy. One example: electrically powered and robo-taxis/UBER-type suppliers, are likely to lead to lower costs of transportation than driving one’s own car. Demands for new cars is thus likely to fall! (The trend towards more cost-sharing, and variations thereof, is adding to this!).
Paradoxically, the more traditional oil companies i.e. producers of fossil fuels which contribute significantly to CO2 emissions, may represent attractive investment opportunities, in the shorter-term. The expected cash flows from such companies are typically rather predictable, i.e. lending itself to unambiguous results from discounted cash flow analysis. But there are nevertheless potential risks associated with these shorter-term investments, such as potential lawsuits.
There seem to be at least two examples of “oil companies” attempting to be significantly changing their strategies away from a heavy association with CO2 emission:
BP – not paying dividends, to be able to significantly invest in alternative industries.
DONG, the Danish company that used to be very active in oil exploration in the Danish North Sea sector. This firm is now a major player when it comes to wind energy.
One final set of comments regarding the “green” investment issue: We are definitely talking about a much broader agenda of changes than from oil companies!: CO2 emissions and its impact on climate/global warming, keeping in mind that major actors such as China, EU and Biden seem to have more or less committed themselves to zero CO2 emission by 2050/2060! Thus, there seems to be a need to do much more than simply ameliorating the fossil fuel-related emission issue.
A major impact might come in the food sector. In particular, we may see the substitution of plant-based food to meats (we already have the plant-based burger, but consumers’ purchasing preferences may change only slowly and may take time to change!). Anyhow, we are likely to experience a shift from the consumption of red meat (see next sentence!) to, say, chicken (with their significantly less consumption of CO2 emitting fodder!).
In the agricultural sector, we may therefore similarly expect more changes. The cattle industry, a major emitter, could receive significantly less governmental subsidiaries, most of it coming indirectly via subsidiaries on Agri-based fodder!
Changes in peoples’ mobility patterns could also lead to less emissions – less air, ship and car travel.
3) What about value investing?
There fundamentally seems to be two types of value investors:
“Deep ones” – investing in cheap assets relative to book values.
Those who look for cheap assets, but also put significant weight on future growth prospects. Warren Buffett, of legendary world fame, seems to fall into this category.
We shall expect to see relatively low growth in the years to come, and perhaps also more inflation (due to very heavy demands on the public sector for investments in social welfare and health, in the US and EU, rather than investments in new job creating infrastructures, and so on). To invest in asset-light companies with high return of capital might therefore be relatively advantageous. Look at sales per employee statistics. Such companies shall not be able to make as major new investments as the more asset-heavy ones. (Asset-light firms on the other hand, may have to “invest” rather heavily in adding human capital, which shall expose such firms by inflation-threats).
All in all, investing in relatively conventional value firms may be quite attractive, and with relatively low risk. This assumes that one might be able to avoid those firms that are particularly asset intensive, as well as those firms that are particularly people intensive!
The issue of timing is key here. Jens recognizes that he might have been too early in his timing of his investments in solar (China, US) and refinement of sugar roes (Brazil) - 10 years too early.
4) Index funds – Advantages and Disadvantages
The management of index funds seems in general to be financially rather attractive for most managers, according to a recent study by The Economist (https://www.economist.com/briefing/2020/11/14/value-investing-is-struggling-to-remain-relevant). Why? In particular, why are many of these index fund investment managers so profitable? Are investors too lazy? And/or, is there a lack of understanding?
A good index fund manager may be able to provide an investor with good returns, combined with relatively less work efforts. But a significant number of independent investors nevertheless opt for the option to do the investments directly, and not via funds, for the following reasons:
They might be able to “beat” the index, but by working hard (studying, constant attention, …).
They might be able to focus on investment areas where they are personally particularly interested, or areas aligned with one’s own investment philosophy.
They might be able to reduce the perceived dependence on future losses from disrupted firms, that figures prominently in many leading indexes (1/3 of S&P’s?!).
They might be able to save on significant fees.
There seem to be at least two sets of recommendations related to a “do-it-yourself” strategy:
Be very careful! And focus as much on broadly-based indexes as possible.
Try to avoid indexes that have carbon-related stocks in them. Focus on so-called zero-carbon funds.
5) Which businesses seem to be in particular danger of being “disrupted”?
Clearly firms which are heavy emitters of CO2 fall into this category:
Oil firms, producing oil which then is burned by other firms, leading to heavy CO2 emissions.
Heavy direct CO2 emitters such as:
Cement producers
Aircrafts
Shipping
Also banking, brick and mortar retailing and linear TV are and will continue to be disrupted.
Paradoxically, there may have been relatively less CO2 emission in the US during President Trump’s four-year reign than at any time before, due to the effect that all the new natural gas coming from fracking (hydraulic fracturing is a well stimulation technique involving the fracturing of bedrock formations by a pressurized liquid) has had the effect that the use of coal (major CO2 emitter!) has gone dramatically down!
And the COVID-19 pandemic has led to “disruptive” changes too:
Real estate
Big “disruptive” threat to hotels, retail space, etc.
Airlines fall into this category also. But as pointed out, second-hand airplanes may become increasingly inexpensive, on sale by conventional airlines. New or startup, low-cost entities may come in, and such new firms may also be able to avoid the excessive burden on conventional work-force structures, often with now uncompetitive wages.
Some “disruptive” threat regarding office space – we probably need relatively less office space than before due to the “working from home” effect, but on the other hand, we require some office space for employees to meet, to be “creative”.
Residential: little “disruption”. More dwellings are needed, given population increases.
Logistics: little “disruption”, warehouses.
It should be pointed out that when the pandemic is over (if ever!), we may see a rather rapid change to many of the things we witnessed in the past, especially due to pent-up demands which could impact travel, entertainment, and restaurants in particular.
A relatively less disruptive sector might be the food staples industry, with firms such as Nestlé, Unilever, Bensicher and Essolte. Many pharmaceuticals and bio-tech firms may fall into this group too. However, one should be aware of the “hot” pharma reality due to the COVID-19 pandemic vaccine, for say, the next six to nine months, as discussed. Some software firms, such as SAP, might be interesting too. And, China is, of course, still a key “player”: Alibaba; Tencent, etc. The recent adverse regulation here is not expected to have significant negative effects.
Additional Question: Are “green” projects providing economic benefits to its investors in the short-term?
Jens reported on three villages in Brazil where the inhabitants had been receiving more advantageous financial rewards from its neighboring villages. No significant position performance effects were seen from this, however. And, Magne gave an example of a re-forestation project in Nicaragua. This seems to be a project with primarily long-term payoffs. No immediate economic rewards from this investment has been had.
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