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When investing in environmental solutions companies, rail businesses tick many important boxes.
They score well in terms of pollution abatement and the efficient use of natural resources, while also responding favourably to the demographic challenges caused by a rising population (e.g. improving local air quality and reducing congestion).
For a considerable time, the rail investment story has been about the modal shift by consumers away from cars in response to high fuel costs and growing concern about the environment. As a result companies like Stagecoach and East Japan Railway have enjoyed an increase in revenues and strengthening balance sheets. For investors, such as those in our environmental portfolios, the benefits have been relatively defensive returns and robust dividend growth.
However, rail investment is much more than a consumer play. The revival of commercial rail networks now offers some of the most compelling growth opportunities, in my view. Like consumers, industrial companies are increasingly seeing rail as a cost effective and efficient alternative to other modes of freight transport.
Importantly, growth in commercial rail has the potential to have a large impact on those key environmental issues mentioned earlier – pollution reduction and the efficient use of resources. According to a recent independent study produced for the Federal Railroad Administration, railroads on average are four times more fuel-efficient than trucks. In fact, moving freight by rail instead of truck reduces gas emissions by 75%, on average.*
US commercial rail business Kansas City Southern is an example of a business benefiting from increased industrial demand for rail freight. It’s one of seven key operators transporting goods across the approximately 6,200 route miles of railway that link commercial and industrial markets in North America. The company actively markets itself on the efficient and cost-effective nature of bulk shipment by rail.
Freight services business Hub Group, meanwhile, offers another way to invest in the efficiency of freight networks. This company offers intermodal, truck brokerage and logistics services, arranging the movement of freight in containers and trailers by rail over long distances via regional ‘hubs’ thereby limiting the use of road transport to local delivery. Without well run logistics handling, the efficiency of freight would be compromised to the detriment of the environment.
For some, these companies are not perhaps your typical candidates for an environmental fund, such as the Jupiter Ecology fund. However, these investments highlight the breadth of opportunities that we consider in the environmental solutions space. Transportation alone offers many others – traditional rail operators, carbon fibre manufacturers to make vehicles lighter, efficient engine manufacturers, rail track developers and engineering services businesses. Crucially, they share a common characteristic: they are supported by economic and environmental growth drivers. This ties in with our long-held belief that investing in environmental solutions businesses is about investing in the long-term structural growth of the global economy.
*Source: American Association of Railroads October 2011
Charlie Thomas is fund manager of the Jupiter Ecology fund.
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