'New' fund may be exception to old rule

Two managers make a one-off case for departing from traditional, tried-and-tested strategies to invest in something different

As a rule of thumb, it is sensible to avoid funds with the word 'new' in the title. In-house marketing departments may get excited by the faddish, but investors should instead entrust their hard-earned savings to proven funds, traditional sectors, boring product structures and tried and tested formulae.

The New Energy Fund from Merrill Lynch Investment Managers (MLIM) may be an exception to that rule. It is run from London by co-managers Poppy Buxton and Robin Batchelor, who also jointly manage the investment house's World Energy Fund.

Ms Buxton, who worked at Esso before joining MLIM, says managing the two funds is as akin to looking after two demanding children.

The World Energy Fund seeks out growing energy companies around the world best positioned to benefit from rising crude oil and natural gas prices. The fund has produced positive returns of 19.40 per cent over three years and 47.60 per cent over one year.

'Oil prices have risen but investors are also starting to price in a slightly higher long-term price. It is nowhere near the stock price or even the long-term futures price, but it is also nowhere near the low price they've got used to in the past,' says Mr Batchelor.

Assets under management have leapt from US$84 million roughly one year ago to $578 million today.

The New Energy Fund is a baby by comparison with just US$50 million in net asset value. But it may have what it takes to be the star of the family. Originally operated as a sub-sector of the World Energy Fund, it launched as a separate entity in 2001 because the two parts were found to appeal to different investors. Separating into two funds also provided an avenue to pursue opportunities in emerging areas of the energy sector.

The fund has risen 35.20 per cent over the past year, but is down over a three-year period. One reason for the disappointment is many of its holdings rise and fall along with the wider technology sector, which suffered a sharp decline in the aftermath of the dotcom bubble.

'These are small companies with developing technology and still at the earlier stage of their life cycle. As a result, when investors get risk averse in the market in general, these shares suffer,' Mr Batchelor says.

The fund's remit is 'to invest in companies at the forefront of developing and commercialising new energy technologies globally'. Potential holdings must have a large potential market - preferably global - and technology that is likely to dominate its space. Most importantly they have to have a strategy that will get that technology into the market, which generally means partnering with a big league player.

The fund invests in four sub-sectors: renewable energies, automotive and onsite power generation, energy storage and enabling technologies. Renewable energy includes diverse areas such as wind, solar, biomass, geothermal and wave energy - all of which are likely to get more attention as non-renewable sources become increasingly scarce.

'It's not just about oil and coal running out,' says Ms Buxton. 'There's pressure at the moment to diversify supply, particularly for heavy importers of oil.'

Technologies such as wind turbines provide clean, renewable and, importantly, domestically controlled sources of energy. The automotive sector encompasses hybrid electric vehicles, which are now being produced by manufacturers including Ford and Lexus, and natural gas engines and fuel cells.

Energy storage devices such as flywheels and hydrogen cells will allow power firms to store energy, something they cannot do now.

'Electricity is always cheaper at night because people don't use as much. If you can produce electricity at night, store it and use it at more expensive times there are economics behind doing that,' says Mr Batchelor.

Enabling energy technologies include tools that turn raw energy into a usable form and devices that improve energy efficiency. Superconductors, wires that transmit electricity without the usual 10 to 15 per cent loss to resistance, make up some of the fund's top holdings. They can prevent bottlenecks on grid systems, which were the main cause of last year's blackout in the United States.

'What one of our companies is doing is to make a shock absorber for the grid,' explains Ms Buxton. 'So when you have power surges, it sucks electricity out of the grid, stores it in a superconductor and puts it back in when you have sags in supply.'