CalPERS investment chief is big on new energy technologies

Mark Anderson - Silicon Valley / San Jose Business Journal
As chief investment officer for the nation's largest public pension fund, Russell Read looks at the big picture. Not so much the big picture today, but the one in 10 or 20 years.

In that crystal ball, he sees the vital importance of energy and commodities all over the world. Much of the existing economy is based on cheap oil. The not-too-distant future will require alternatives, and the California Public Employees' Retirement System is big enough to give alternatives a boost. Future energy demand will create entirely new industries -- and fabulous financial returns. Read is piloting the system to invest in those technologies and companies.
Read joined CalPERS in June 2006. He hasn't made any dramatic changes at the pension fund, but pushed for more ability to invest in emerging markets, commodities and hedge funds.
"I came into an investment office which is highly successful.... The challenge of investing successfully is that opportunities shift," he said. The opportunities available even five years ago have gone away, and new ones have appeared. The new opportunities are energy, alternative energy and infrastructure.
The fund's recent commodities investments have done well, and Read said it is important to understand why.
The answer: Demand. Huge demand from the rest of the world for commodities from oil to concrete to steel to grains.
"The reason we have such high energy prices is not because we have a supply problem or we have an inventory problem," Read said. "The reason why we have had such protracted increase in prices has been because of the sustained increase in demand worldwide and the prospect that this increase will continue at a very high rate, not just in the industrial world, but particularly from the developing world over the coming 20 years."
The most difficult challenge -- and the biggest opportunity -- lies in the distribution and production of energy and basic commodities, Read said. In the past four years, prices on concrete, wood and steel -- commodities that usually don't shoot up in price -- have skyrocketed. It is unlikely prices will drop. The increase is driven by demand in Asia; America, long the world's massive consumer, isn't driving this change.
"One of the surprises that people have in the U.S. is that we are used to being the swing factor for commodities supply and demand," Read said. "The predominant demand will come from Asia. China and India are much more the swing factor than the U.S. is."
To illustrate the point, Read points to new coal-fired plants opening at a clip of one every four days in China and one every eight days in India.
"It has a dramatic impact not only on coal but frankly on a wide range of commodities and energy-related industries," he said.
"This is where it gets interesting. Do we believe there will be an essential demand for 100 million new vehicles in India and China 10 years from now? We would say 'yes.' Could that be powered from conventional petroleum sources? Probably not," he said. "We know there will be demand and there will not be enough energy using current energy sources or current technology."
There are a host of new technologies and fuel sources that will play a critical role meeting world energy demand, Read said, and many of them are clean sources. Market forces will create compelling long-term investment opportunities for CalPERS over the coming decade, and the system will play a constructive and profitable role, Read said.
Everybody wants to save the world, but CalPERS is in a unique position: With assets of more than $250 billion, it is big enough to do something about it.
"There are situations where our size can act to our advantage," Read said. The system can deploy enough money into a technology to make the difference between it happening and not happening "and allow us to use our scale to an advantage. It is essential we find opportunities where our scale can be used for us and not against us."
Getting new energy technology to the market runs against scale and competition with existing oil industry and a subsidized corn ethanol market.
"We have a narrow set of (federal) subsidies right now," he said. "Corn-based ethanol receives a subsidy while methane from municipal waste does not. I can name 10 similar technologies that are actually at a competitive disadvantage because of subsidies for corn."
The former hot industries of real estate, information technology and biotechnology aren't nearly as rich in potential as energy, Read said. Suddenly there's money going to research.
"This is significant," he said. "What will be surprising to investors and to the public will be the rate of technology change in the energy sector."
Source: mlive.com