How to get exposure to the clean energy transition

Funds Management

by Tim McGowen

Katana Asset Management Portfolio Manager Romano Sala Tenna discusses ASX valuations, getting exposure to clean energy, investment philosophy and market outlook.

Tim McGowen: We're talking today with Mr Romano Sala Tenna, who is the Portfolio Manager of the Katana Australian Equity Fund and the Co-Founder of Katana Asset Management. Now, Katana's investment approach is to have a broad mandate that is not limited by index weighting, sector restrictions, thematics or company size. The mandate also allows the portfolio to move swiftly to significant cash weightings when defensive. Romano, thanks for your time. Welcome to Sydney.

Romano Sala Tenna: Yeah, pleasure to be here.

Tim McGowen: Now, can we talk through... Market's been really volatile lately. Can we talk through how you see valuations on the ASX?

Romano Sala Tenna: Yeah. Valuations really depends whether you're looking in the rear-view mirror or forward looking. I mean, rear-view mirror, they're very reasonable on historical earnings. Looking forward, of course, that's a million-dollar question. Much harder to try and form a view on where we see them. We haven't formed a definitive view on valuations. What we have said as a team is that we expect valuations to come off, earnings to come off from here. We're just starting to see the first round of earnings downgrades. We think that's got some time to play through. And once we've seen that cycle run its course, then we'll start to form a view on valuations.

Tim McGowen: And, obviously, one of the thematics in the market is this clean energy transition. It's attracting a lot of attention globally. How's the portfolio positioned in that regard?

Romano Sala Tenna: Yeah, it's a good question. And if you look at the top thematics in the world today, that is number one by a mile. Electrification, decarbonisation, which are really two sides of the same coin. There's nothing bigger. And it's going to be a multi-decade thematic. So, absolutely critical to try and play it.

As an Australian-only fund, it is not easy to replicate or to get exposure to that thematic. We've done it in two ways. Firstly, we've looked specifically at the green metals themselves. So, if you look at our largest holding at the moment, it's Mineral Resources (ASX:MIN) for the lithium exposure. Allkem (ASX:AKE) is a top holding as well. So, lithium and copper -- we've got some good copper exposure -- are the two ways we played it in the metal side.

Technology-wise, it's very hard. It's very hard to find companies in Australia that are going to be world leaders in their space. I'm sure there will be in time, but it's hard to know which ones will make it and which ones won't, and it's not the game we play. We have got some modest exposure to the HGEN ETF. That gives you exposure to about 20 hydrogen companies globally, and also to the clean energy one. So, it's not ideal for us. But where we can't find direct exposure in Australian landscape, if it's an Australian listed ETF, we're prepared to play it that way.

Tim McGowen: And you touched on a couple of stocks there. Can you give an example of your investment philosophy and talk through a stock example?

Romano Sala Tenna: Yeah. If you look at something like Mineral Resources, which would be our largest holding at the moment, we've been investing in Mineral Resources since 2006, since the IPO. And we've scaled up and down according to how we see valuations in the market. Go back to January this year, and our weighting would have been down close to zero, if not 0 per cent. And now it's at over 7 per cent. Now, to put that in perspective, in 17 years of running the fund, we've had three stocks that have been above 5 per cent weighting over 17 years -- Commonwealth Serum Laboratories (ASX:CSL), Commonwealth Bank (ASX:CBA) and Mineral Resources (ASX:MIN). So, it shows you how high conviction we are on this company.

We are genuinely style agnostic, so we try and bring the best precepts from value, growth, quality, fundamental and momentum, combine them together. And when we look at that in Mineral Resources, we see a lot of those things. We see growth coming with valuation, great business model, great management team, and also price momentum.

Tim McGowen: And what's your outlook for markets now? I read through one of your fact sheets. You've got quite a high cash weighting. That's when you get defensive. So, how do you see the market moving forward?

Romano Sala Tenna: Look, it's the most challenging we've seen in at least five years, possibly a decade. You've got so many well-documented headwinds. You've got what's happening in China, the property market and COVID lockdowns. You've got QT. Quantitative tightening now is US$95 billion a month as at 1 September. You've got Fed raising interest rates. You've got inflation. You've got all sorts of problems. If, in six months' time, we look back to today and said, "Oh, that correction was obvious", or crash was obvious, you wouldn't be surprised. The one thing that concerns us is that it does seem to be consensus positioning. Every person to a T is expecting these markets to roll over the next couple of months. And when people expect that en masse, they've generally positioned that way, which means that it's not as likely to happen. So, I think for less conservative investors, you could look at deploying capital now.

We always say you can't get a great company, at a great price, with certainty. You got to give up one of those three things, either give up a great company, give up a great price, or give up certainty. So, I think you can get great companies at great prices now if you want to give up certainty. For us, we're ridiculously risk averse, and so capital preservation is first and foremost what we're about. So, we'll sit on the sidelines. We're going to buy ourselves some time over the next month or two. We're sitting on about 35 per cent cash. And we'll just see how these markets unfold. Fundamentally, we should see the markets roll over and see some of these factors start to drive earnings lower, but it is consensus positioning, and investing's part art, part science. The science bit we understand, the art bit sort of always tends to poke you in the eye.

Tim McGowen: Thanks, Romano, for your time. Markets always have a way of teaching us lessons. So, thanks for your time.

Romano Sala Tenna: They do indeed. Pleasure.


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