New Memo from SAIP: 2021 and the energy transition 💸⚡️📈

Introducing the SAIP investment newsletter

Dear Partners,

The Sam and Alex Investment Partnership (SAIP) quarterly memo started with a distribution of two (the author’s parents), and a readership of zero (they didn’t care). However, we were not dissuaded, and are here to bring our insights and investment philosophy to you each month.

At SAIP we are constantly on the lookout for the big trends that will create opportunities, generate returns, and make our world a better place. We are bringing these insights to you and hope that they help make sense of the rapidly changing world around us.

Based on our research on the outlook for 2021, we have identified two important trends that will generate returns while improving the lives of people and the health of the planet. These two trends align with our framework of seeking companies and industries that align with the three D’s - decentralized, decarbonized, and digitized.

The first of these trends is the ongoing Energy Transition⚡️, which since inception has been a central focus for SAIP. The shift from fossil-based to renewable energies is the largest wealth-creation opportunity of our time. Global energy investment has exceeded $1 trillion annually in recent years and will continue to grow. Companies that are innovative, low carbon, and financially robust are core holdings for SAIP. Our Energy Transition holdings are focused on electricity generation infrastructure, decarbonization of transport, and technology.

The second secular trend shaping our world is the Fintech Revolution💸 - the decentralization and digitization of the global financial system. Estimates indicate that by 2022 the global financial services market will be worth $26.5 trillion, growing at 6% annually. 

As has happened in cycles since the beginning of human history, we will see a refactoring of global finance and money. This will give rise to a new financial order built on decentralized and digitally native technologies.

These big changes in energy and finance - two of the building blocks of human civilization - are in their infancy and will continue to grow for decades. 

Energy Transition ⚡

The hottest decade on record is coming to a close, with the last five years being the hottest since 1880. 2020 is just two-hundredths of a degree cooler than 2016, the hottest year ever recorded. The Earth is nearly 2 degrees Fahrenheit warmer now than it was in the 20th century, and greenhouse gas concentrations in the atmosphere are still rising.

At SAIP, we view climate change as the most important threat that humanity has faced. It is a challenge of immense scope however, the opportunities presented are on the same scale. We view this as a huge opportunity for the world to create low-carbon infrastructure and technology and spark a new wave of innovation and prosperity.

2020 may have been a turning point in the fight to reduce emissions and slow climate change. US emissions are down 9% this year due to the reduction in travel and economic activity due to the pandemic. In addition, it is conceivable (and we hope) that 2019 may have been the peak year for global fossil fuel demand and greenhouse gas emissions.

In the context of this transition, SAIP is investing in sectors and companies that are furthering the electrification and decarbonization of the global economy.

When tracking the past decade in financial markets, it is clear that clean technology has outperformed traditional fossil-based energy stocks in the United States. Below we compare a basket of fossil fuel companies (US Energy ETF) against a similar basket of clean technology and renewable energy companies (Clean Edge Green Energy ETF).

To ensure that we capture the upside of this transition while mitigating risk. We are focusing on companies with strong balance sheets, market tailwinds, and long growth runways. These companies will thrive in the energy transition and are long-term holdings. Our view is not to trade frequently or time the market, but to hold these for a long duration (#hodlgang) or until something changes in the investment thesis.

In our next letter, we will investigate some companies that we think are poised to add value to the energy transition and how they have performed as part of our portfolio.

The data 📈

For this month’s chart, we used Google Finance data from Jan 1, 2020 - Dec 31, 2020 for the NASDAQ Clean Edge Green Energy Cleantech Benchmark and iSHARES US Energy ETF - Fossil Fuel Benchmark. We visualized the data by using a one-month moving average of the total daily percent change for each benchmark.

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