Wayne Wachell of Genus Capital explains how the success of fossil free-funds highlights built-in risks within the oil sector
Before the coronavirus pandemic, few people could have imagined just how low the energy sector could be brought down. But for Wayne Wachell, the risks have always been plain to see — and his firm’s fossil fuel-free funds have benefited accordingly.
“Typically in our fossil-free portfolios, we target long-term performance by underweighting energy, but overweighting technology, consumer discretionary, financials, and communications services,” said the CEO and chief investment officer of Genus Capital. This strategy has meant that Genus’ fossil free portfolios have fared better than traditional portfolios, demonstrating them to be more resilient during this market downturn.
“Technology has been a big winner in this pandemic, obviously; you have Microsoft and Amazon with their cloud-based technologies, and some other names that are posting all-time highs.”
Underlying that sector allocation is a belief that the world will shift from the old economy, which to a large extent benefited sectors like the airline industry, to a new digital economy. For now, the situation is simply status quo, but Wachell believes it will eventually develop into a new normal.
“Demand for oil might bounce back,” he acknowledged. “But we don’t think it’s going to bounce back to where it was before. Business travel is going to be down, usage of mass transportation will decrease as social distancing makes it less feasible, and virtual meetings are becoming more acceptable than ever.”
For many investors, the bet on the new economy has been driven by a desire to protect the environment and prevent climate change. But for many like Wachell, it’s also about avoiding a financial catastrophe in the making.
“For years, we’ve had prominent names like [former Bank of Canada Governor] Mark Carney talking about the problem of stranded assets in the oil sector,” he said. “If we limited our carbon consumption in line with the Paris Accord, half the world’s fossil-fuel reserves will be stranded underground, which would impact share values and loan values for oil companies.”
The world had a taste of how markets could be impacted by that threat in March, when Saudi and Russia refused to cut back their oil production. The way Wachell sees it, both countries were concerned about their reserves losing value in the face of cratering demand, and decided that they would rather squeeze out the high-cost marginal operators than participate in a coordinated attempt to control prices through supply cuts.
“The risk of stranded assets is coming to the forefront,” he said. “We’re hearing more discussion of universities and pension plans accelerating their portfolios towards being fossil-free, which will definitely have major implications on the pricing of hydrocarbons.”
While Wachell believes a near-term rebound is likely for the energy sector as supply adjusts downward, he noted that four-year futures for oil are coming back to US$40, compared to US$55 to US$60 when the pandemic started.
The oil sector’s weighting in the global markets has also shrunk considerably over the decades, he added, giving investors the chance to move into other wealth-creating sectors — hopefully with motives that go beyond the financial. In line with this, Wachell also anticipates an increase in impact investing as investors look to use their money to fund solutions to world problems.
“I think this pandemic has given society, communities, and investors more awareness of how nature can impact us,” Wachell said. “That’s hopefully opening more people’s eyes to the topic of climate change, and the need to be prepared for natural calamities like this.”