Скачать или смотреть A generational investment opportunity could be emerging

In the latest episode of ETF spotlight, Paul Baiocchi, Head of Fund Strategy at SS&C ALPS Advisors explains why investing in electrification infrastructure could be the next big boom.

Transcript:

CAROLINE WOODS: Joining me now, Paul Baiocchi, head of fund strategy at SS&C ALPS Advisors. Paul, thanks so much for joining us.

PAUL BAIOCCHI: Thanks for having me. I'm excited.

CAROLINE WOODS: So we're talking electrification. Electricity demand is expected to grow at rates not seen since the 1960s due to things like AI, of course, and reshoring consumer trends. When you look at this trend, where do you see the biggest opportunities for investors?

PAUL BAIOCCHI: Well, I think to level set, it's important to understand what's driving it. And it's largely AI data centers. People see it in the news. And then they think about consumer-level trends, switching from ICEs to EVs. Then you've touched upon policy trying to bring back manufacturing capacity in the United States. Some of the big deals, investments that have been announced as part of the trade deal framework. Understanding what's driving it then leads into the question about how you invest in it.

Because, importantly, what we believe is that you get a lot of exposure already in your core equity exposure to the companies that are driving rising electricity demand, whether it's Nvidia or the hyperscalers who are investing in these massive data center projects. Whereas what you think about downstream, what the implications are of electrification, where are the companies that are going to benefit. And largely, we believe it's companies in various segments of the energy market. It's certainly utilities companies, because those are the ones tasked with providing that electricity at higher loads. And then you can get into the nuts and bolts, the picks and shovels, if you will, of the electrification infrastructure buildout.

CAROLINE WOODS: So I was taking a look at your fund, Alfie. It really spans multiple sectors and industries, but it focuses more on companies that benefit from the rising demand, not necessarily the ones that produce it. However, some of your biggest holdings — Sterling Infrastructure up more than 70% year to date, Macau up almost 40%, Generac, GE, Vernova also posting impressive year-to-date gains. For those investors who are trying to think of entry points, is now still a good time to get in?

PAUL BAIOCCHI: Well, we believe that this is a generational investment opportunity, a trend that's not going to play out over the next 18 months, but rather over the course of the next 10, 15, 20 years or even more. And the reason we believe that is because you hit on it a little bit in terms of electricity demand growth not seen since the 1960s.

Well, to put some numbers behind it, FERC has put together some projections. And just as a baseline, we've grown electricity demand in the United States at about 0.4% annually over the past couple of decades. FERC says a baseline expectation is 8% electricity demand growth over the next decade plus. And then if you start to layer in data centers and increased EV adoption, 15% plus growth in electricity demand.

So with that growth in electricity demand comes a need for investment in the infrastructure. And we're starting to see numbers put behind this. Bloomberg NF has forecasted $100 billion in annual investment in grid improvements in the coming years. And then you look at the Edison Electric Institute, which is projecting CapEx budgets for utilities. They spent about $1.5 trillion over the past five years in CapEx and are expected to spend $1.1 trillion over the next five years.

So the investments are coming from a number of angles, and it's important to understand where that investment is going. And to your question about what is a good entry point, I think we were fortunate when we launched Alfie in April that the market was starting its bottoming process, and so we've benefited from the strong rally off of those bottoms.

But some of these trends — copper demand, natural gas demand, potentially down the road, application of small modular reactors in the nuclear space — isn't going to just play out over one market cycle. It's going to play out over multiple cycles. And because most core equity allocations are oriented toward technology, which is 30% of the S&P 500, and hyperscalers/utilities, which is 40% of LP, aren't necessarily well represented in your typical asset allocation framework. And so LP is additive from a diversification perspective. But also, importantly, unlike a lot of thematic portfolios, it's not just aiming for high flyers. The baseline of the portfolio being in utilities speaks to a defensive orientation in a sector that maybe is changing its stripes in terms of potential revenue growth and new compounding opportunities.

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