How surging power demand could spark a generational investment opportunity

The Street

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

00:00Joining me now, Paul Biocchi, Head of Fund Strategy at SS&C Alps Advisors.

00:05Paul, thanks so much for joining us.

00:07Thanks for having me. I'm excited.

00:08So we're talking electrification.

00:10Electricity demand is expected to grow at rates not seen since the 1960s

00:15due to things like AI, of course, and reshoring consumer trends.

00:20When you look at this trend, where do you see the biggest opportunities for investors?

00:26Well, I think to level set, it's important to understand what's driving it,

00:30and it's largely AI data centers.

00:32People see it in the news, and then they think about consumer-level trends

00:36switching from ICEs to EVs.

00:39Then you've touched upon policy trying to bring back manufacturing capacity

00:43to the United States, some of the big deals, investments that have been announced

00:46as part of the trade deal framework.

00:48And understanding what's driving it then leads into the question about how you invest in it

00:54because, importantly, what we believe is that you get a lot of exposure already

00:59in your core equity exposure to the companies that are driving rising electricity demand,

01:04whether it's NVIDIA or the hyperscalers who are investing in these massive data center projects.

01:11Whereas when you think about downstream, what the implications are of electrification,

01:17where are the companies that are going to benefit?

01:18And largely, we believe it's companies in various segments of the energy market.

01:23It's certainly utilities companies because those are the ones tasked with providing that electricity

01:29at higher loads.

01:30And then you can get into the nuts and bolts, the picks and shovels, if you will,

01:34of the electrification infrastructure build-out.

01:37So I was taking a look at your fund, ELFY.

01:41It really spans multiple sectors and industries, but it focuses more on companies that benefit

01:47from the rising demand, not necessarily the ones that produce it.

01:52However, some of your biggest holdings, Sterling Infrastructure up more than 70% year-to-date,

01:59MCOR up almost 40%, Generac, GE Vernova also posting impressive year-to-date gains.

02:06For those investors who are trying to think of entry points, is now still a good time to get in?

02:13Well, we believe that this is a generational investment opportunity,

02:16a trend that's not going to play out over the next 18 months,

02:19but rather over the course of the next 10, 15, 20 years or even more.

02:24And the reason we believe that is because you hit on it a little bit in terms of electricity demand growth

02:29not seen since the 1960s.

02:31Well, to put some numbers behind it, FERC has put together some projections.

02:35And just as a baseline, we've grown electricity demand in the United States at about 0.4% annually

02:41over the course of the past couple of decades.

02:44FERC says a baseline expectation is 8% electricity demand growth over the course of the next decade plus.

02:51And then if you start to layer in data centers and increased EV adoption,

02:5615-plus percent growth in electricity demand.

02:59So with that growth in electricity demand comes a need for investment in the infrastructure.

03:03And we're starting to see numbers put behind this.

03:06Bloomberg NEF has forecasted $100 billion in annual investment and grid improvements in the coming years.

03:14And then you look at the Edison Electric Institute, which is projecting CapEx budgets for utilities.

03:20They spent about $1.5 trillion over the past five years in CapEx.

03:23They're expected to spend $1.1 trillion over the course of the next five years.

03:29So the investment's coming from a number of angles.

03:32And it's important to understand where that investment is going.

03:35And to your question about what is a good entry point,

03:38I think we were fortunate when we launched Elfie in April that the market was starting its bottoming process.

03:43And so we've benefited from the strong rally off of those bottoms.

03:47But some of these trends, copper demand, natural gas demand, potentially down the road,

03:53application of small modular reactors in the nuclear space, isn't going to just play out over one market cycle.

04:00It's going to play out over multiple cycles.

04:02And because most core equity allocations are oriented toward technology, which is 30% of the S&P 500,

04:09and hyperscalers, utilities, which is 40% of Elfie, aren't necessarily well represented in your typical asset allocation framework.

04:18And so Elfie is additive from a diversification perspective.

04:21But also importantly, unlike a lot of thematic portfolios, it's not just aiming for high flyers.

04:28The baseline of the portfolio being in utilities speaks to a defensive orientation in a sector that maybe is changing its stripes

04:36in terms of potential revenue growth and new compounding opportunities.

04:40Do you use AI when trying to choose which companies you're going to invest in?

04:46We don't.

04:46So Mark McLean, who is at Ladenburg-Thalman and was in utility finance for a long time,

04:51came up with the index.

04:53And it pulls from, as you said, five different sectors, 18 different sub-industries,

04:58minimum market cap of $5 billion.

05:00And the reason I bring that up isn't to promote the strategy as much as to give a sense of how this requires textured exposure.

05:08It requires a mosaic of strategies to capture this electrification theme.

05:13And Elfie is one piece of it.

05:15But you think about commodities portfolios that own and track the individual commodities themselves,

05:20whether it's copper, whether it's some of the base metals that are going to be critical to the grid infrastructure,

05:24or midstream energy infrastructure, which are the companies that own the pipelines that ensure the natural gas produced in the United States

05:31gets to the utilities, gets to the data centers, to be hooked up to, as you mentioned it,

05:36a GE Vernova gas turbine to allow that data center to have access to reliable electricity.

05:41So for someone interested in investing in the electrification trend,

05:47what is the most important thing they need to know before investing?

05:50I think they need to know that it isn't going to be captured necessarily,

05:55at least completely, by your typical equity strategy that's cap-weighted,

06:00whether it's an S&P 500, Russell 1000,

06:02because a lot of the companies in the electrification theme or that stand to benefit from the electrification theme

06:08aren't necessarily big weights in indexes at this moment.

06:12And so trying to reorient your portfolio to ensure that you get exposure to some of these companies

06:17before, perhaps, their market cap contribution to an index grows.

06:22And also, to be creative and thoughtful and deliberate about how you go about allocating to it.

06:28Don't close yourself off in terms of the exposures that you use to get the electrification theme in a comprehensive way.

06:36And just finally, any key risks they should be aware of?

06:39Sure. I think the key risk is that we're ramping up to invest in all this new capacity,

06:44whether it's AI data center capacity or even utility capacity, electrification capacity, grid capacity.

06:52And there is always the risk of overinvestment.

06:55We saw it with that DeepSeek sell-off earlier in the year,

06:58where there were concerns that maybe all of these projections,

07:01all of this CapEx budgeting that's been announced,

07:04isn't going to be as necessary as maybe the market was anticipating

07:07because someone could do it cheaper and more efficiently.

07:10Well, that to us is the big downside risk in this space

07:14as just like these hyperscalers are spending massive amounts,

07:17$85 billion, $90 billion, $100 billion in CapEx spending,

07:21if utilities companies, which are 40% of Elfie as a benchmark,

07:26overinvest in capacity and they aren't able to realize the profitability potential

07:31because electricity demand doesn't manifest in the way that's being projected,

07:36that could undermine the opportunity.

07:38Okay. Thank you so much for shedding some light on the space.

07:41My pleasure. Thank you.

07:43That's Paul Baiocchi, head of fund strategy at SS&C Alps Advisors.

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