NEXTX: A Guide for Advisors and Their Clients
[One of the most frequent questions we receive about our equity growth strategies, from both advisors and individuals, is "how would your mutual fund or separate account fit into my/my client's overall portfolio?" In this post, Green Alpha Partner and Senior Vice President Robert Muir puts the question in context and provides our views on the answers -- GJ.]
At Green Alpha Advisors, our first and foremost responsibility is, as a fiduciary; to represent the best interests of our separate account clients and mutual fund shareholders. Institutions, individuals, their consultants, and advisors entrust their hard-earned money to us. Our overriding mandate is to invest these dollars wisely and responsibly. It is precisely because of this mandate that our investment philosophy and thesis is focused firmly on economic and, by logical extension, environmental, sustainability. The only economically justifiable and responsible long-term investments we can make on behalf of our clients and ourselves are those allocated to the industries, companies, and innovations that will lead to the mitigation and eventual displacement of the untenable and globally disruptive business models that are the heritage of the industrial revolution. To us it is clear: The inefficient and unsustainable business practices of the obsolete fossil fuels-driven economy, characterized by the denial of disruptive and detrimental externalities, unchecked and exploitive use of resources and raw materials, and little to no waste to value economy, is a poor place to seek economic growth.
Green Alpha Advisors constructs portfolios of equities chosen from our proprietary universe of "Next Economy" companies -- those whose technologies, goods, and services are essential in the inevitable transition to a sustainable economy. The result of this thesis is that many Green Alpha Portfolios fall into the category of growth equity. Our most visible offering, the Shelton Green Alpha Fund (NEXTX), of which we are the sub-advisor, is categorized as mid-cap growth by Morningstar. Although the fund is in actuality all-cap, we were pleased to be ranked on 3/31/2014 the number one Mid-Cap Growth Fund - One Year3 by Morningstar, and the overall number one Large-Company Stock Fund – One Year5 by Kiplinger.
When constructing growth equity portfolios, we at Green Alpha Advisors look to our identified universe of public companies to select those equities that demonstrate what most analysts and stock pickers would consider emblematic growth characteristics. We identify fast-growing and emerging market sectors, often with high barriers to entry, and acquire shares in the firms that dominate these markets. We look for stocks that have posted steady historical earnings and revenue growth, preferably well above industry standards and, more importantly, which we judge will continue to demonstrate strong forward earnings and revenue growth. Many of our portfolio holdings are technology leaders and own proprietary intellectual property in patents and technologies that generate a consistent revenue stream from licensing fees and sales. We look for businesses with expanding profit margins, and we don't shy away from companies that, rather than paying out profits through dividends and stock buy-backs, are reinvesting those earnings to gain ever-greater market share and top-line growth. We expect efficient and innovative management, transparent and accepted accounting practices, and executives who keep a close eye on cost control and best use of revenue and earnings.
On top of our search to identify companies with strong growth characteristics, we also strive to incorporate into our stock-picking process traditional value-seeking methodologies. We look to purchase firms with consistent and predictable cash flows, defensible business models, and shares that trade at compelling valuations relative to both book and their overall industry. Additionally, we tend to benefit from the fact that many of the companies we follow are not yet heavily covered by the traditional analyst community. Often we identify undervalued equities before they gain the notice of the broader market, enabling us to enjoy the price momentum generated when these companies attract mainstream attention.
Stated plainly, one might say that, in terms of style, at Green Alpha we focus on growth -- and seek it at the best possible value1.
The Shelton Green Alpha Fund (NEXTX) exemplifies this investment approach. To illustrate, here are a few of the portfolio's characteristics as of 3/31/2014. On that date, NEXTX had a Price to Book ratio of 2.45 vs. 2.64 for the SPY2, a Price to Sales ratio of 1.53 vs. 1.67 for the SPY2, a Long Term Debt to Equity ratio of 0.41 vs. 0.75 for the SPY2, and a 12 Month Forward EPS Growth forecast of 38.12% vs. 9.31% for the SPY2.
While seeking exceptional growth at good value, we look carefully at overall portfolio construction, attempting to strike the optimum balance between risk and potential return, upside and downside capture ratios, and concentration versus. diversification. We keep turnover low to maintain tax efficiency, and we make every effort to provide a competitive expense ratio. Again, I'll use NEXTX as a case in point. The Fund, as of 3/31/2014, posted a trailing one-year total return of 56.09% vs. 21.86% for the SPX3, listed a beta of 1.35 vs. the benchmark SPX2, and had an upside capture ratio of 183.40, while the downside capture ratio was just 69.713. Thus the Fund achieved substantial alpha for only marginally higher than nominal beta, while affording exceptional upside participation along with broad downside protection. NEXTX currently contains 56 individual holdings, which are representative of 28 different industry sectors. From inception, 3/12/13, through fiscal year end 2013, the Fund expense ratio was 1.24%, 14 basis points lower than its capped limit of 1.38%, with a turnover rate of just 12%4.
We are pleased that many network and independent advisors have begun evaluating the Shelton Green Alpha Fund (NEXTX) as a growth equity holding suitable across all of their portfolio models, not solely those focused on "green," "SRI," or "impact" investing. This consideration has brought with it the inevitable question: What percentage allocation do we deem appropriate for NEXTX? Aware that every investment model and client portfolio has different investment parameters and objectives, we hesitate to offer specific weightings or allocations. However, we will state that we believe the NEXTX is a high-quality, non-correlative portfolio appropriate as a core equity holding suitable for a material portion of an overall growth equity allocation. Green Alpha Advisors remains committed to sustainable, fossil fuel-free investing, and we are honored by the advisor community's recognition of NEXTX as a highly competitive product that brings an added level of diversification to any equity investment model.
1.This approach does not fully apply to our Growth and Income Portfolio, Global Enhanced Equity Income Portfolio, or Select Solar Portfolio.
2. Thomson Reuters Analytics
4. Shelton Green Alpha Fund, Annual Report, August 31, 2013
SPY = SPDR S&P 500 ETF Trust
SPX = Standard and Poor's 500 Index
To obtain a prospectus, visit www.sheltoncap.com or call (800) 955-9988. A prospectus should be read carefully before investing. Shelton Funds are distributed by RFS Partners, a member of FINRA and affiliate of Shelton Capital Management. Green Alpha Advisors is not affiliated with either RFS Partners or Shelton Capital management.
Robert Muir is a Partner and Senior Vice President at Green Alpha Advisors, LLC. He is a member of the Shelton Green Alpha Fund (NEXTX) Investment Committee.