As news filtered through last Wednesday that Donald Trump would return to the White House, climate stocks were among the hardest hit.

The Invesco Solar ETF dived 10 per cent on the day, offshore wind companies Ørsted and Vestas shed nearly 13 per cent, and electric vehicle charging providers Blink Charging and EVgo sank 11 per cent.

But when Munro Partners chief investment officer Nick Griffin checked the firm’s Climate Change Leaders Fund on Thursday morning, he wasn’t surprised to see it had actually gained more than 2 per cent.

“It’ll cost around $50 trillion to $100 trillion to decarbonise the planet over the next 50 years, so that’s a lot of revenue for companies enabling the transition,” Griffin says. Louis Trerise

“We feel like we positioned for this outcome,” Griffin says.

“The energy transition is still going to happen. It’ll change slightly under Trump but these areas we’re invested in, we really liked them before Trump got elected, and we still like them after Trump is elected.”

The robust start to November extends a stunning run for Munro’s $125 million climate fund, which returned 73.9 per cent in the year to October 31. That was more than double its benchmark MSCI All Country World Index in Australia dollars, which gained 28.4 per cent over the same period.

The outperformance represents a remarkable turnaround for the portfolio which was launched in October 2021, just three months before a bear market kicked off as central banks aggressively lifted interest rates. That caused the fund to sink 20.7 per cent in its first financial year of operating.

But the dirt-cheap valuations ended up working in Munro’s favour as the firm capitalised on the subsequent rebound.

Sifting through the rubble

Griffin and co-portfolio manager James Tsinidis bolstered the fund’s exposure to companies focused on energy efficiency, which have become some its “best and easiest wins”.

The duo added positions in heating, ventilation and airconditioning stocks, which play a crucial role in cooling data centres, but in a way that saves electricity and energy. This includes Comfort Systems and Johnson Controls, which are up 120 per cent and 44 per cent respectively this year.

The portfolio is also centred around electricity generation companies that power the data centres, such as nuclear producer Constellation Energy and electric power system company GE Vernova.

“The biggest companies in the world are trying to build these huge data centres which require massive amounts of power, but these businesses also have the strictest zero carbon targets in the world,” Griffin explains. “So they have to power these data centres with carbon-free power.”

Constellation has been in Munro’s climate change portfolio for nearly three years and has more than quadrupled in that time.

It remains the fund’s largest position as Munro believes the company’s earnings can triple over the next six years.

“It’s an amazing company. They are the power unicorn for the US,” Griffin says. “They own and control 16 nuclear power plants, which have gone from being orphan assets to being quite valuable because they’re now the largest source of carbon-free power in the country.”

“It’s a very unique company because no else has that footprint and no one else can leverage the carbon-free power they have.”

The climate fund typically holds between 15 and 25 stocks from around the world that benefit from the transition to a decarbonised planet. It has a focus on clean energy, sustainable transport, energy efficiency and the circular economy.

Munro has been a long-time holder of chip giant Nvidia, which remains in the fund’s top five positions and has been a key contributor to performance.

The market darling fits into the portfolio’s parameters because of its ability to lower emissions per unit of computing in data centres.

“Not only do Nvidia’s products accelerate compute, they also make the most power-efficient chips in the world, so that’s another reason why the hyperscalers have shifted more onto Nvidia,” Griffin says.

Munro’s CIO admits the climate change fund has experienced some luck given it was holding these stocks before the AI and data centre boom took hold.

But Griffin also attributes the portfolio’s stunning turnaround to solid management.

Dodging landmines

Indeed, Munro tactically moved away from the lagging sectors in the energy transition such as solar, wind and electric vehicles over the past 12 months, particularly given the growing likelihood of a Trump presidency.

“Even though demand for solar and wind is very strong, the companies just haven’t been executing well on the orders they were getting,” Griffin says. “There was also the US election overhang so we were staying away until that was resolved.”

While many climate investors have been caught out by the softer-than-expected demand for EVs, which led to an oversupplied market, Griffin had noticed red flags.

“There was just a massive oversupply of EVs in China so they have just dumped them all around the world, which has effectively triggered a price war,” he says. “So we stepped to the sidelines because we think it will take a couple of years to work out.”

Many of these laggards were already cheap before the US election, but confirmation of Trump’s victory triggered another sell-off.

So Griffin is keeping a close eye on the sector, given it has valuations approaching levels that are almost too attractive to ignore.

“It’s almost at the point where you would happily start looking at these stocks anyway because the price has fallen so far,” he says.

One company that Griffin is closely tracking is US domestic solar producer First Solar, which is down nearly 35 per cent from its peak in June.

“People misunderstand it, but we think they are a potential winner, particularly if China stops dumping solar panels into the US,” he says.

Trump-proof portfolio

Griffin is confident the climate fund is now firmly Trump-proof, having reduced its solar, wind and EV exposure due to the possibility that the returning president will repeal the Inflation Reduction Act, a milestone climate law backed by the Biden administration.

While that remains a key risk to the energy transition, Munro is actually positioned for a number of tailwinds for the climate sector under the new Republican government.

“Trump is very keen to have things built in America, so that will benefit companies in the fund that will build out the electrical grid,” Griffin says, underlining its positions in Eaton Corporation.

Munro is also prepared for looser regulation and an easing in restrictions from the Federal Trade Commission, which it expects to result in more mergers and acquisitions.

“That will definitely favour some of the US waste companies we’re invested in,” Griffen says, pointing to holdings in GFL Environmental and Clean Harbors.

Finally, a lower tax rate is expected to benefit the broader US sharemarket, a region to which Munro’s climate fund has a near-80 per cent allocation.

While some investors doubt the potential returns provided by climate stocks, Griffin puts that scepticism down to the poor performance of passive products such as exchange-traded funds.

“Investors picked an ETF with 60 companies and a lot of them were low quality, and I can assure you there’s no shortage of companies in this area claiming to be doing things that they’re not actually doing,” Griffin says.

“But our actively managed product was able to navigate that a lot better than ETFs did, and I think our performance proves the opportunity is there and will be there for many years to come.”

Munro initially tried to launch the climate fund in 2019 after noticing that companies were starting to set net zero targets amid pressure from investors. But the start of the pandemic in 2020 forced the firm to delay it.

Griffin has been tracking the sector for nearly two decades, and was determined to learn the intricacies given it is often overlooked by investors.

“We’ve ended up getting to know these companies really well, which has created a huge source of alpha for not only our climate fund but also our other strategies too,” he says.

Indeed, the climate change thematic is the largest exposure in Munro’s $1.5 billion global growth strategy, making up more than 15 per cent of the fund.