PODCASTS

PARTICIPANTS

Daniel Yungblut
Guest Host, Vice President & Head of Research, Chair of ESG Investment Committee

Jennifer Stevenson
Vice President and Portfolio Manager

Mark Brisley: You're listening to On the Money with Dynamic Funds, the podcast series that delivers access, insights, and perspective from some of the industry's most respected active managers and thought leaders. From market commentaries and economic analysis to personal finance, investing, and beyond, On the Money covers it all. Because when it comes to your money, we're on it.

Dan Yungblut: Welcome to another edition of On the Money. I'm your host Dan Yungblut, and I oversee investment research at Dynamic Funds and also take a lead on our ESG initiatives as chair of our ESG Investment Committee. For today's session, we wanted to unpack some of the exciting opportunities we're seeing in the Dynamic Energy Evolution Fund and Energy Evolution ETF.

To help, we have co-lead portfolio manager of those mandates, Jennifer Stevenson. A few things I'd like to get through; one is the Inflation Reduction Act in the U.S., the recent Canadian Federal Budget, and other policy support globally.

Also, a few other areas like the role of hydrocarbon companies and how they can support the transition. I first really want to get into the background of the Energy Evolution Funds. Now, there are policy tailwinds right now, but I want to make sure that investors understand that there is really a long-term secular theme here. This isn't just a short-term trade because of recent government policies.

On that front, Jen, could you give us a bit of background on the Energy Evolution Funds? What inspired you to define the mandates the way you did?

Jennifer Stevenson: About three years ago, there was a real increase in the amount of attention being focused on ESG investing and climate change. We looked at it as really a long-term transition into electrification and cleaner energy sources to reduce emission. When we looked at it, our existing utility and pipeline and energy producers had already been into this for years or even decades.

It wasn't a step out for us as the current managers of the fund to look at companies specifically in these lines of business. At that point, which was well before we had these recent encouraging government policies and incentives, et cetera, we believe that the evolution of the energy industry was a growth area over the long term with a large global opportunity set.

Then with respect to ESG, generally, when we thought about it, the idea that the market was going to evolve into companies that are more environmentally conscious than they are today, if that's what you screened for, all of the companies were going to be doing the same thing, and that greening and improving of their footprint would be less and less relevant because they would all be doing it.

When we looked at it and the mandate for these funds, when we focus on companies that offer solutions to themselves and others so they can all become more environmentally conscious and less emissions and have a real impact, that looked like a really good way to differentiate from other offerings out there that were more blanket ESG.

Dan: Now, to pick up on that, there are a ton of responsible investment ESG-focused products out there. A lot of them are going to focus on renewable energy. From your perspective, how would you say investors are thinking about the differentiation of the Energy Evolution Funds and why they shouldn't just buy a passive index product?

Jennifer: The whole thing, for me, when I look at the contents of any index versus a sector, with an index, you get the good with the bad, you get the risky with the safe, you get everything, and there's no selection of the good stuff.

With active management, we can look globally for the best opportunities. We have a big team to draw from, both geographically and within industries. That allows us to position in the most attractive parts of this evolution of the energy sector and of climate initiatives, and we get the best companies within those sectors from a risk-return perspective.

There's lots of new emerging, unproven, groovy technologies out there, and they're exciting and they sound great, but that doesn't make them all investable. They could all be in an index, but it doesn't mean they're investable. With an active approach, we base that on a top-down macro view, combined with a bottom-up company and industry fundamentals. That's really the way to go to get the best outcomes, and it allows us to have the Energy Evolution Fund and its ETF, look at the entire space of this energy evolution, energy transition, and not just the parts of it that make the news.

Dan: I'll certainly trumpet the importance of active management. Let's dive into that a bit. If active management can help identify those opportunities, where do you see the biggest opportunity sets and where do you see their best growth potential?

Jennifer: The world's really diverse across the energy evolution landscape in different countries. There's different regulatory environments, different market and currency risk. The government policies and the incentives are different, and they're all interlaced within different industries and different sub-sectors in this broader energy evolution theme. With active management, we can look at things like electrolyzers in Norway. We can look at carbon capture and storage in Canada. We can look at residential solar and hydrogen in the States and mining, whether it's rare-earth, or uranium, or lithium in Canada and Australia and some parts of South America.

For biofuels and wind, there's lots of really great companies in Europe, and the opportunity set is huge. The growth is real, and the government incentives are big. When we look at all of that, the greatest growth potential, it somewhat depends on your timeframe, of course.

Right now, we like storage, so both residential and industrial, whether that's utility-scale or a battery in your garage. We like solar generation; we like mining, and we like industrials. When you look at those individual sectors, if you think about solar, for example, we've got residential solar, we've got utility-based solar, but within the broader solar sector, there's solar trackers, there's microinverters, there's battery storage. There's a wide range of businesses.

Again, you want to be active so you can evaluate and pick and choose and invest in the best ones within all of those individual components. In the mining space, we're in safe jurisdiction. We know the workers are treated fairly. We know there's contract sanctity for ownership. We know the products can be exported and sold, and we can get liquid currency.

Those are important. We're in the right countries to invest in things like lithium and copper and rare-earth and other battery metals and uranium.

Industrials, it's a big catchall that we like for growth. If you think about it, none of the technology or the infrastructure or that fun stuff required for the energy transition would get manufactured or shipped or installed without the component parts. It doesn't matter whether it's hydrogen or ammonia transportation ships or the little sensors and cables and transformers in the circuit breakers that are needed as all of this electrification increases.

There's a lot of different pockets of growth, which being active in being global allows us to avail ourselves of.

Dan: Relatedly, I want to pick up another point you made on just that some of these emerging technologies might look great potentially, but not necessarily investible, at this point. With some of these themes, how do you think about the difference between investing and speculating?

Jennifer: That's a really good question because, to us, speculating isn't investing. Speculating is gambling. If investors want to do that with their money, that's super fun and they can do that however they want. They can go to Vegas, they can pick an untested technology, and see if it works out or not. As professional investors and stewards of capital with fiduciary obligations, we invest.

We look at companies that have proven technology. It doesn't mean it can't be new, but it needs to be implemented and proven and underweight. Then the growth in the future can be enhanced by improvements and new features and that sort of thing. Over time, we've become a bit more conservative, but more about the life cycle of the company. They're more mature and less early stage than when the fund was first constituted.

That's a bit of a reflection on the industry itself, but it's also a reflection on us being more focused across this global opportunity suite. The strategy is still growth-focused and we're definitely lower weight the more defensive sectors like the renewable power companies of the utility nature, but we are more conservative as far as the life cycle. More mature companies, less early stage, and really focused on the growth.

Dan: As a quick aside, how does nuclear typically fit in?

Jennifer: We've got one utility that – it has nuclear power. Otherwise, there's not ways to invest in companies that we like in nuclear other than the uranium itself. We do have a Canadian uranium miner as well as a utility generator of nuclear power, both bookends as our exposure to the nuclear sector right now.

Dan: Now take it a step back. Some fantastic tailwinds here and different policy errors but a lot of noise in markets. Concerns about inflation, interest rates, and growing concerns about recession. Offset, of course, we've both alluded to it, but the Inflation Reduction Act in the U.S., the recent federal budget in Canada, a lot of different countries have policy support for the energy transition. With all of this floating around different countervailing points, why is now a good time to think about clean energy and how it fits in a portfolio?

Jennifer: The key thing, for me, is that inflation is real although it's definitely moderating. Not that going into the grocery store is fun again yet, however, when we see it on the industrial side, the input cost side for things like commodities, it's definitely slowed down or flattened out. That's important. Interest rates are a real thing. We're expecting them to hang out where they are for a while. Whether there's a mild recession or no recession, the thing we look at is the clean energy investment thesis. It's now structural.

Climate change is an accepted fact by governments and there's been Accords signed globally, like the Paris Accord. There's been others. Every couple of years, we have a council, the parties meeting, a COP 26, 27, 28, et cetera, and these are all because countries' governments understand that climate change needs to be addressed. We need to reduce emissions. We need to reduce the level of CO² in the environment. This acceptance means we need a lot of investment to do this and yet we still need to make sure that we're meeting the ongoing and increasing energy demands because the population is still growing.

We still have growing economies. Even if we have a recession in the next little while, we still have long-term economic growth and that requires energy, as does the population growth. These programs that the governments are putting in place, whether it's the massive Inflation Reduction Act in the U.S., which, despite its name, is really focused on investing in renewable energy, clean energy, energy transition, however you want to characterize it. We've got this massive act in the U.S.. We already had programs in Canada. Those were increased under the recent federal budget.

There's been lots of criticism about the budget that it wasn't enough. If you're holding up the IRA in the U.S., Inflation Reduction Act as the standard, I don't think anyone’s going to be enough because theirs is absolutely humongous. What our federal budget does is certainly provide encouragement and incentives for development in Canada of things that we're really good at,like carbon capture and storage, like hydrogen hubs, et cetera.

The nature of the IRA in the U.S. is that it wants manufacturing and energy source growth domestically, but it recognizes that you can't do it all domestically. There is the concept of friend shoring, nearshoring, whatever you want to call it, but that you can get your inputs that are still tax effective from your neighbours. Canada is part of that along with Europe and some other countries in the world. There's just a lot of stimulation for investment, whether it's in the U.S., in Canada, in Europe, in places like South Korea. It's not transitory, it's structural. It's long-term. It's big investment. It's big incentives, and the incentives are more in the form of a carrot than a stick, which means they'll get done.

With this kind of structural focus, we really think it's important to be incorporated into portfolios and take that long-term view on the appreciation and the value of these stocks. When we think about some of the noise as far as recent headlines, whether it's bank failures for example, or like I said, inflation or interest rates, it affects all of the companies in the market but the companies that are investing in the energy transition have got the advantage of these government incentives and programs that are long-term and structural in nature as well. That helps to make up for some of the noise from things like interest rates, concerns about credit, or inflation. Again, when we're able, as active managers, to pick strong companies in defined growthy areas of the business, we can really see that incentive programs counteracting any of the negativity from things like interest rates and inflation. I think it's a good time to get invested in this space.

Dan: I'll suggest that, a lot of stakeholders in the energy transition likely had assumptions on how it'll go and what were the big concerns between amount of energy produced and affordability. But the war in Ukraine has seemed to likely disrupted some of those assumptions and energy security has been pushed to the forefront as another key concern to manage through the transition. For the energy evolution mandates, how do you think about how the war in Ukraine and energy security has impacted your approach and opportunities?

Jennifer: The war in the Ukraine really shone a spotlight on energy security. Not just meeting growth in energy demand globally, but where you get it from. As heinous and unfortunate this war has been, the actual disruption of hydrocarbons from Russia like oil has been a lot less than was initially feared. The disruption of products, oil products like gasoline and diesel and jet fuel from Russia has transpired, and the disruption of natural gas from Russia has transpired.

What this has done is caused a scramble, at least last winter, and I would say it'll happen again this winter, in Europe, for other sources of energy, and part of that is scrambling to get more natural gas. The other part is focusing on investments in renewables where they can do it domestically or they can do it with their friendly neighbours or their friendly international partners, and get their energy needs that way.

We see the opportunities that fit our mandates really well because the investments coming in secure jurisdictions, so the types of places that we invest in, whether it's North America or Europe or parts of South America or parts of Southeast Asia. It plays into where we are looking for growth and it just provides additional opportunities as much as we would like the war to just be over, but we need to make sure these energy demands are met. It has provided some increased investment opportunities for the funds.

Dan: No, absolutely. An important consideration out of an unfortunate event. The last one we wanted to touch on was what might be surprising to some, that incumbent hydrocarbon producers actually are playing a role in the transition to lower emissions. Can you talk a bit about how they factor into our march towards net zero?

Jennifer: Yes. That was one of the things when Frank Latshaw and I were talking with the management of the shop about the mandate for the Energy Evolution Fund. It's not picking up new stuff for us because, whether it's our pipeline companies or our energy producers, oil and gas, our utility companies, they've all had investments in electrification and renewables. It's not new for us, it's not new for them, and then companies just focusing on those specific areas, that's fine.

When we already know the underlying technology, it's much easier to go through the growth prospects and the financials of a different company. With the hydrocarbon companies now, they are unique in their subsurface expertise like underground. If you think about running subsea electrical cables or drilling to put CO² in the ground, we've done that for decades to get oil out.

This way we're just putting the CO² in a different reservoir and leaving it in. No problem. Then you can combine that with the focus on some of the above ground technologies, whether it's wind or solar, to create a really strong partnership. We're seeing not just investments from the hydrocarbon companies in the renewable energy, which they've done for years and are continuing to do, but we're seeing more joint ventures between companies.

Companies that are providing say compressed natural gas fueling stations, partnering with a natural gas company and companies that have gas stations putting in electric vehicle charging and partnering with electrical vehicle charging companies. Things like this, we continue to see increasing going forward. That combination is just another way that we move the technology forward and provide more of it to make sure we have a positive impact on climate change, and it gives us more investment opportunities going forward.

Dan: The energy transition certainly presents a lot of opportunities for investors to, one, generate returns that align with your financial goals, but also really help contribute to our transition, to lower emissions. Appreciate everyone's time today, and Jen, thank you for your time.

Jennifer: Thank you.

Mark Brisley: You've been listening to another edition of On The Money with Dynamic Funds. For more information on Dynamic, and our complete lineup of actively managed funds, contact your financial advisor or visit our website at dynamic.ca. Thanks for joining us.

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