Investments in fund units are associated with risk. Past performance is no guarantee for future returns. The money invested in a fund can increase and decrease in value and it is not certain that you will get back the full amount invested. No consideration is given to inflation.
The stock market defied gravity in 2019 and rose by almost 35 percent, which is the highest annual return in 10 years. Climbing a wall of worry is an old saying on Wall Street that describes how a strong stock market can handle or even be spurred on by bad news. This describes 2019 very well. The end of 2018 struck a dull note as stock exchanges fell steeply right up until Christmas, and the market worried about a slowdown in the global economy on the back of a trade war and rising interest rates. However, thanks to a U-turn by the Federal Reserve in a very final days of 2018, a striking reversal of the trend set the scene for a fantastic year for stock markets.
Climate is an existential global issue, and the world is successively striving to reduce its dependence on fossil fuels. The UN has already drawn lines in the sand with the Paris Agreement’s 2-degree target and Agenda 2030’s 17 global sustainable development goals. These ambitious plans provide great opportunities for companies with the right products for transition, and major challenges for companies with high fossil dependence. Regulations and taxes will guide investment to speed up the shift. The financial industry can play a significant role in this development by steering capital and setting the right price on corporate activities. This is particularly evident in the EU Action Plan on Sustainable Finance.
It is not only for policy and environmental reasons that our funds are refraining from investments in fossil fuels, but above all for financial reasons as the risks of investing in the sector increase. Companies are increasingly finding it difficult to extract their reserves for multiple reasons. As the vehicle fleet and electricity generation transition, there is a risk that demand, and therefore oil prices, will fall and eventually make it unprofitable to start new projects to extract new reserves. In addition, banks are seeking to move away from exposure to the coal, oil and gas industries, which makes it more difficult and expensive for these companies to access capital. The risk premium on these types of investments and companies is therefore rising, and we believe this is a trend that will continue.
Catella Fonder has previously excluded investments in fossil fuels from its traditional equity and fixed income funds. From the end of November, Catella’s absolute return funds have also been free from investments in fossil fuels. Companies that were sold during the year included Flex LNG, Torm, Drilling Company of 1972, Frontline, Euronav and BW LPG. However, Catella Hedgefond is able to capitalise on falling stock prices for companies that produce, process or transport fossil fuels by allowing the fund to short these sectors.
To further capitalise on the trend of a fossil-free future, the fund has increased its investments in companies that can reduce emissions in other ways. One example is SSAB, which produces steel with lower CO2 emissions than the sector average. SSAB is also developing methods for reducing iron ore using hydrogen instead of coal, with the goal of becoming completely fossil-free. Another example is Rockwool, whose stone wool insulates buildings and reduces the energy needed for heating.
Catella Fonder will continue to develop our approach to best invest in companies that promote both a sustainable transition and the return on the funds.
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