The investing world is full of cunning hands that profit from financial calamity. Ken Heebner of CGM Focus fame made a killing during the dot-com bust by shorting tech stocks. More recently, other astute investors have grown their portfolios by betting against banks and home builders. Nicolas Huber aims to profit from a different type of calamity: climate change. More specifically, he invests in companies set to thrive in a world of rising temperatures, melting glaciers, and mounting natural disasters.
Huber's DWS Climate Change fund, which so far is down 7 percent since its September 2007 inception, holds not only alternative-energy companies but also firms involved in infrastructure, waste management, and energy efficiency. U.S. News talked with Huber about what makes this investing theme work. Excerpts:
How do you invest in climate change?
Climate change is no longer just a social, political, or moral issue. Increasingly, it's also an economic and business issue. The Stern Report, published in 2006, said if companies don't change the way they produce goods, they may not be in business in the future. [The British government report said neglecting to address climate change could slash the world's economic output by 5 to 20 percent annually.]
We believe the move from fossil fuels to renewable energy sources will be one of the biggest investment trends of the 21st century. Rising commodity prices are forcing businesses to rethink their production methods and find ways to cut costs by becoming more energy efficient. The fund looks to invest globally in companies working to reduce environmental pollution or companies whose growth is supported by environmental regulation.
What companies are well positioned to profit in the face of climate change?
We invest in companies involved in the mitigation of, and adaptation to, climate change. Mitigation includes clean-technology companies, which are looking to generate power with lower emissions. One example is Rayonier, a global forestry leader and supplier of timber and cellulose products. It is coming up with new timber-production technologies that limit the release of CO2 into the atmosphere. Energy efficiency is another mitigation theme. Some of these companies have been completely overlooked in the past because demand wasn't there for their products. Companies that offer energy-efficient air conditioning systems, such as Daikin Industries, are starting to take off. That's because consumers these days are reacting to the...uptrend in energy prices, and they're more likely to buy energy-efficient appliances. Another efficiency company we like is United Technologies, which is insulating all kinds of buildings in the Mideast and making energy-efficient elevators that don't use as much power.
Adaptation companies help address the effects of climate change, such as more severe weather, natural disasters, and pollution. An example here is Covanta Holding Corp., the largest energy-from-waste company.
How do you find the best stocks in each category, and what are the risks?
We look for companies with unique investment ideas, established market share, solid business models, quality management, and those that stand to benefit from environmental regulations. We're not only looking at the obvious plays. With LED lamps, for example, we're thinking about who else is profiting. That's ultimately companies that make the machinery that produces the lamps, such as Aixtron, a German firm.
Alternative energy stocks are very vola-tile, more so than the overall market. The investing problem is obvious: Trying to figure out the next big technology isn't always the easiest thing. We're trying to pick clear winners, but in the long run—just as we saw in the technology boom—it's not always easy when you have different technologies and different regulations.
How might the fund's holdings look 10 years from now?
Our investment universe will continue to broaden, as more and more companies enter the space of clean technology and energy efficiency. You'll also see more industry giants moving into this space. Many are already investing in clean technology, which is a sign that this is no longer a social change championed by environmentalists—it's also a moneymaking enterprise. It will be very interesting to see which companies are flexible enough to respond to climate change, as well as increasing energy and technology costs.
We think one of the biggest growth areas in the future will be green consulting. Just look at Iowa's natural-disaster events to see the need for consulting companies. An example is RPS Group, which does environmental, health, safety, and risk consulting.