Stephen Derkash, adviser to EQM Indexes, has become something of a specialist in clean energy, having had over 20 years of global portfolio management, working at UBS in long only international growth equities and in hedge funds, most notably as a Portfolio Manager at Millennium Management.
HANetf’s TANN, Europe’s lowest cost Solar Energy UCITS ETF, launched in June 2021, is based on the EQM solar index which has seen a somewhat volatile return – up 251 per cent in 2020 and flat year to date this year – but represents what Derkash calls a capitalist standpoint based on the very strong expected growth of the industry.
The driver behind the launch of TANN was that, at the time, there was no solar ETF in Europe or the UK. “The market opportunity driving us was that the cost of solar power has come down about 90 per cent and in most countries, it is the lowest cost form of energy,” Derkash says.
Some 30 per cent of greenhouse gas emissions come from the electric utility sector, and solar is one of the main pathways for power sector de-carbonation. The electricity sector is expected to transform from being the largest CO2 emitter today to the first sector to reach net-zero by 2040, driven largely by solar, Derkash explains.
“It’s a mega theme as 4 per cent of all electricity globally is solar and now that it is the cheapest, there are expectations that solar will double in the next two years and by 2030 double again,”he says. “By 2027, solar capacity is expected to suprass coal and to become the largest source of electricity capacity in the world. By 2050 over 35 per cent of electricity could be solar-powered.”
He explains that an investment in solar power is more of a project finance investment, with all the strengths and weaknesses of that in terms of sensitivity to the cost of capital with projects that can last for between 10 to 20 years.
“It’s way beyond rooftop solar panels,” he says.
The fund utilises a modified equal weighting methodology. Companies with 60 per cent+ solar revenue receive a weighting of ~2.5 per cent. Companies with 5-60 per cent of solar revenue receive a weighting of ~1.3 per cent.
Constituents in each respective bucket are given equal importance, regardless of their market capitalisation, but with greater exposure afforded to more pureplay stocks and 80 per cent+ of constituents are in the pureplay bucket.
TANN provides 70 per cent+ exposure to small and mid-cap stocks. HANetf believes that the modified equal weight approach offers a distinct approach to diversification within the solar energy industry.
Derkash has recently returned from a road trip around Europe, including Milan, Munich, Frankfurt and London and has found a great deal of interest in the growth potential of the solar industry, and almost a level of surprise from potential investors.
In 2020 solar and solar ETFs on the back of it, tripled in terms of price but has gone through something of a time correction on valuations, Derkash says.
“Solar is project finance driven and is sensitive to the cost of capital which went down to the zero level in 2020 and 2021 benefiting solar but since then it has gone sideways. It’s a growth thematic. If you look at growth rates for the industry you see compound growth rates of 20-24 per cent and the expectations of forecasting groups are a consensus on the 20-30 per cent range driven by cost,” he says, citing the Chinese move to transition away from being an oil and gas importer to nuclear, solar and wind powers.
“It’s a big deal if you think the growth will be there it comes down to the multiples,” Derkash says. “If you think the cost of capital is going to become more benign or even go down, that could be a big catalyse for many types of project finance with 20-year cash flows.”