Sustainable Energy - October Commentary

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Past performance does not predict future returns. 

Review of 3Q 2025

The third quarter saw broad-based positive performance in the fund, reflecting clarity around US policy, the start of an interest rate easing cycle and inflecting electricity demand for AI and data centres. The 13% valuation discount of the fund to the MSCI World looks increasingly attractive as positive earnings momentum returns.

The Guinness Sustainable Energy Fund delivered a return of +11.0% during the third quarter of the year, outperforming the MSCI World Index, which finished the period up +7.3%. Within the portfolio our top-contributing segments were electrical equipment and electrification, while generation was the weakest contributor. All subsectors contributed positively in the quarter. This year, the fund has returned +24.0% versus the MSCI World’s +17.4%.

Analysis of 3Q 2025 individual stock contribution

There was little in the way of thematic or geographic differentiation in the quarter, with all of our subsectors and regions represented in the top ten contributors. Key discussion points were as follows:

Our electrical equipment companies performed well, driven by an acceleration in global electrification activity, grid spending and, in certain cases (such as Legrand), exposure to the data centre subsector. Top contributor Prysmian announced a number of significant new power cable contract awards (taking its backlog to a record level, estimated at Eur17bn) and benefited from US steel tariffs as a result of its US domestic manufacturing activity.

Shares in Ameresco performed strongly as the company benefited from improved clarity around US clean energy policy and demonstrated strong underlying demand for its energy solutions business in its 2Q results. Less pressure from the US Department of Government Efficiency (DOGE) helped to derisk Ameresco's project pipeline and give the market confidence in the company's growth outlook.

Amphenol shares performed strongly due to very strong 2Q results and robust forward guidance giving confidence in its AI-driven growth trajectory. These strong results followed similar strong delivery in 1Q 2025 and make Amphenol our second-greatest contributor over the year to date.

Installed Building Products demonstrated its superior positioning within the US construction market with strong 2Q earnings that reflected a shift towards commercial building, a focus on local (rather than national) builders and the sell-through of an expanding range of complementary products.

Poorer contributors covered various themes and end markets. Shares in Enphase continued to be weak as the elimination of the 25D US solar residential tax credit started to bring lower demand for US customer-owned residential solar systems. Shares in Carlisle underperformed as the outlook for US construction and residential spending slowed, causing management to lower organic growth and margin guidance for 2025. Despite a normalisation of inventory levels, power semiconductor manufacturers Onsemi and Infineon also delivered poorly as expectations for the speed of recovery in their markets proved to be too optimistic.

3Q 2025 contribution for Guinness Sustainable Energy Fund

Source: Bloomberg, Guinness Global Investors estimates; 30 September 2025

Performance in the third quarter reflected improving trends across a number of different subsectors and end markets within the sustainable energy industry. The Guinness Sustainable Energy portfolio is exposed to a range of different themes covering the supply of sustainable energy, the electrification of demand and the expansion and upgrading of global power grids.

Source: Guinness Global Investors; 30 September 2025

Earnings expectations for the fund are improving

A clearer policy outlook, the expectation (and subsequent delivery) of the start of an interest rate easing cycle and the sharp uptick in electricity demand related to AI and data centres meant that 2025 and 2026 earnings expectations for the fund increased over the quarter. A return to positive earnings momentum is a key positive catalyst for the fund, which is projected on consensus estimates to deliver earnings growth in 2025 in excess of the MSCI World Index. Looking back, the fund has delivered earnings-per-share (EPS) growth in excess of the MSCI World (8.4% per annum from 2019-2024 versus the MSCI World at 6.8% per annum) and, based on current consensus expectations, it should return to that trend again. Including recent 2Q 2025 results, fund EPS is expected to grow at 14% per annum to 2026 (reflecting 10% growth in 2025 and 18% in 2026) while the MSCI World is expected to grow at 10.1% per annum to 2026 (reflecting 9% growth in 2025 and 11% in 2026).

Earnings per share (US$) for the Guinness Sustainable Energy Fund and MSCI World index

Source: Company data, Guinness estimates, 30 September 2025

The cash return of the fund’s holdings (a measure of real economic return on capital employed) has also moved higher over 2024 and 2025 and has now reached nearly 11%, for the median holding at the end of September 2025. This is the result of improvements in the cash returns of various existing investee companies, plus some high grading of the portfolio. Looking back over the fund’s history, cash returns are now at a peak level and, for the first time since 2019, they are at a premium to the median cash return of the MSCI World index.

Cash returns for Guinness Sustainable Energy Fund and median MSCI World index

Source: Company data, Guinness estimates, 30 September 2025

Despite growth potential, valuation still at a discount to the MSCI World

The positive return in the quarter led to the 12-month forward price/earnings ratio of the fund increasing over the quarter from 16.9x to 17.7x (+5%) and the outperformance took the fund to a 12-month forward P/E discount of 13% versus the MSCI World (versus a 15% discount at the end of June). Since the end of 2022, the P/E of the fund has compressed by 8% (from 19.1x to 17.7x) while the MSCI World has inflated from 15.5x to 20.4x, an increase of 32%.

Valuation and earnings growth of the Guinness Sustainable Energy Fund

This 13.4% annualised EPS growth implied by consensus today is lower than prior forecasts from 2021 and 2022 but comes from a more diversified end market exposure and from a group of higher quality companies. Should this earnings growth play out, we would expect the fund’s 13% P/E valuation discount to the MSCI World index to close and, potentially, move back to a premium reflecting the forecast earnings growth premium to the MSCI World index.

Guinness Sustainable Energy Fund and MSCI World P/E (1yr fwd)
Absolute and relative

Conclusion

We have seen further continued improvement in the sustainable energy sector in the third quarter of 2025 resulting from increasing global electricity demand, a better-than-expected resolution to US clean energy policy and supportive policy elsewhere in the world. This backdrop is better than anything that we have seen in the last 24 months. Improvements in quality and diversified exposure to better structured end markets should allow fund earnings to grow in 2025 and 2026 and bring greater confidence in the longer-term earning potential. We believe that our basket of sustainable energy equities provides attractive exposure to earnings growth in excess of the MSCI World at a valuation discount to the MSCI World.

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