Investing in under-the-radar clean energy winners

Sam Benstead sits down with Polar Capital Smart Energy manager Thiemo Lang to discuss the opportunities arising from the transition to a clean energy economy.

Lang explains how he breaks up the market, including clean power generators and energy conversion/storage firms. He goes into depth on opportunities from electrification and artificial intelligence, and why solar power is his standout clean power source.

Polar Capital Smart Energy is a member of ii’s ACE 40 list of recommended sustainable funds.

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Sam Benstead, deputy collectives editor, interactive investor: Hello and welcome to the latest Insider Interview. Our guest today is Thiemo Lang, manager of the Polar Capital Smart Energy fund. Thiemo, thank you very much for coming in.

Thiemo Lang, manager of Polar Capital Smart Energy: Thank you for having invited me.

Sam Benstead: The Smart Energy fund: what is it and how are you investing?

Thiemo Lang: It's a fund that is investing in the energy transition towards renewable energy, towards electrification, towards energy efficiency. We have an eligible universe of roughly 250 companies we are allowed to invest in.

Sam Benstead: And you are an engineer by background and then moved into fund management. You're investing in a highly technical space. What advantages does your background give you as a fund manager?

Thiemo Lang: Yes, I have a technical background, and [managing] a clean energy fund is the perfect [opportunity] for me to add my technical experience from the past into such a product. This is because investing in clean energy is much more about investing in new technologies than investing in some sort of new commodity, as is the case with traditional energy funds.

Sam Benstead: And clean energy. What are the big themes you are investing in, and can you give some examples of stocks that fit those themes?

Thiemo Lang: The big common denominator is really the electrification trend. We are now seeing entire industries moving towards electrification. Good examples are the transportation and automotive sectors, but also the heating of buildings or industrial processes, industrial applications, even fertiliser production, they will all move towards electricity, and electricity supplied by carbon-free energy or electricity sources.

Sam Benstead: What types of companies does this lead you to? Can you give us some examples of the stocks you invest in?

Thiemo Lang: We invest over the whole value chain. So, starting with companies in the clean power generation sector, these are companies from the solar wind industry. Then we have two investment clusters in the infrastructure buildout, so companies that invest in the building of the electrical grid in the future, also hydrogen networks, [and] we have a cluster of energy conversion and storage. We invest in power semiconductor companies, which we see as essential in the transformation towards electricity and battery companies.

And then we have the fourth cluster, energy efficiency, where we also cover the demand side of the equation. This is the biggest cluster, and here we address all the different end markets, [including] in building efficiencies, the automotive sector, or the energy efficiency of big data. For example, the IT sector has become a big issue for us.

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Sam Benstead: In the top 10 companies, there aren't many I recognise. I don't think many of our viewers will recognise them either. So, can you give us some extra information about some of those most-loved companies that you own?

Thiemo Lang: Right now, the energy efficiency of big data has become a big issue for us. As we are seeing now, moving graphic processors into applications where data processing is really accelerating. We see also energy needs really doubling over the next [few] years. New data centres are being built and we have to do it efficiently because otherwise electricity consumption will go through the roof. We have done our own estimates and expect that AI-driven data centres will consume roughly 40GW of power in 2027, which represents the entire electricity consumption of the UK today. So, it's huge.

Sam Benstead: What types of companies are benefiting from this, and are they really expensive given the opportunities ahead?

Thiemo Lang: We have companies such as Vertiv Holdings Co Class A (NYSE:VRT), which do the buildout of data centres, the thermal management, and the thermal cooling of chips like from Nvidia. And we have companies such as Marvell Technology Inc (NASDAQ:MRVL), which are responsible for the data processing or the optical interconnect. We have a few others we are investing in as well.

Sam Benstead: Electric vehicles is one of the most exciting areas in this energy transition theme. It's very visible here in the UK. Why do you like that sector and how do you invest in it? And what about Tesla Inc (NASDAQ:TSLA)? That's the flagship name there. What do you think about that company?

Thiemo Lang: In the EV space, this year's probably a bit more quiet, I would say. Also new models from Tesla are missing, [which is] also [the same with] the other car manufacturers, the Western car manufacturers. We'd rather see it as a 2025 theme. Here, we expect we'll accelerate momentum. This year, we might have maybe 25-30% growth still, but it's mostly travel by China followed by the US, and Europe will be a bit more quiet.

In the EV space, we invest predominantly in the supply chain. So, semiconductor companies that are essential to really optimise the drive train, to optimise the charging into the battery of the vehicle, etc. So, [in this area], we are investing in quite a lot of power semiconductor companies.

Sam Benstead: And why is the supply chain a better place to invest in EVs than the actual car manufacturers themselves?

Thiemo Lang: The barriers of entries are higher, so they have much better margins. Even if you look at Tesla, I mean, they're profitable. That's OK, but here you talk about cost margins of 15%. But if you look at the rest of the EV manufacturers, it's already difficult for them to break even right now. The semiconductor companies, they have 35-40% cost margins, or even higher. And you are more diversified, right? Because if you invest in a company, an example is Infineon Technologies AG (XETRA:IFX) or Wolfspeed Inc (NYSE:WOLF). They have [many] different clients, being the original equipment manufacturer (OEM) or the tier one supplier into the car OEMs. So, you are much more diversified if you invest in them.

Sam Benstead: Rising input costs has been one of the themes about investing in industrial companies recently. With all this inflation, I think particularly wind turbine manufacturers had a difficult time because of that. Is that a space you invested in, wind turbines and maybe solar power as well?

Thiemo Lang: We were completely out. Now we have limited exposure in companies such as Vestas Wind Systems A/S (XETRA:VWSB) and Nordex (XETRA:NDX1). As you correctly point out, the wind industry was particularly hit by cost inflation, offshore wind. You had bidding processes in the UK where there was not a single bid because the companies could no longer match it. You had cost inflation at 30-50%. Fortunately, this is going back again, and we are more [positive] that the price inflation we have seen in the wind industries is soon [to be] a story of the past. Again, in solar it's already much better. So, the solar prices are at a new, all-time low already.

Sam Benstead: Of all the renewable power sources, which is the most exciting to invest in?

Thiemo Lang: I'm a big fan of solar. We have to go the solar way. Wind is OK if it's offshore because then nobody sees it, but onshore wind is compromised. You have all the systems, and nobody wants to have a five megawatt wind turbine in their backyard. Therefore, solar is the way to go, and you can do it in a very decentralised manner on the rooftops or the ground, and [it is] extremely flexible.

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Sam Benstead: And you invest in solar panel manufacturers, or is it again a supply chain trade for your team?

Thiemo Lang: Solar is a good example of being very cautious in what you are investing in because solar till today is a sector with pretty low barriers of entry. Even after 15 years, the sector hasn't consolidated yet. The margins are pretty low, and sometimes you are in a situation where demand exceeds supply. And then you have the “rising tide lifting all boats” phenomenon.

But, over the long run, the solar industry is very much compromised in that the margin profile of the solar module manufacturers, etc, is not that interesting. Again, we prefer to invest in companies that build the electrical grid or supply electronics into inverters rather than invest in the inverter companies or the solar panel manufacturers themselves.

This year it has also become a very political issue, notably in the US where they have trade restrictions towards China, etc, which drives up the module prices of imported modules. Again, you have to be very cautious [and ensure that] if you invest in such companies, you understand the political risks that might be associated with them.

Sam Benstead: Thiemo, thank you very much for coming in.

Thiemo Lang: Thank you for your interest.

Sam Benstead: And that's all we have time for today. You can check out more Insider Interviews on our YouTube channel where you can like, comment and subscribe. See you next time.