Next Economy Rising: Green Alpha Advisors' Annual Client Letter and Portfolio Commentaries 2013, and 2014 Outlook
As 2012 was coming to a close, we at Green Alpha were enthusiastic about the prospects for the sustainable economy in 2013. In a post from that time we wrote, "we have difficulty imagining a near-future scenario where the best next economy companies don't become the most important to society and subsequently, potentially the best performing. The decisions we make as an interconnected global civilization now will be the difference between catastrophe and a thriving society with a healthy economy. Given the stakes, we have no doubts about how to place our bets." At heart, our macroeconomic thesis is simple: if we cannot utilize innovation to address Earth's and civilization's urgent problems, neither is likely to endure in a way that we would recognize.
As 2013 unfolded, institutions and governments around the world initiated, renewed and expanded renewable energy targets and programs, investment banks began coverage of many green companies both in and out of the energy space, a campaign to encourage institutions to divest from fossil fuels took flight, and even some who had been ideologically opposed to green economics began to embrace the independence possible with renewable energies. Almost daily, we've seen headlines along the lines of "UN Climate Chief Calls For Tripling Of Annual Renewable Energy Investments."
As a result of these developments, popular awareness of both the value metrics and growth potential of next economy stocks finally began to emerge in earnest. This awareness, in, turn, led to significant upside performance for many of the firms we track in leading the way towards a sustainable economy.
Green Alpha results and developments in 2013
We managed three separate account strategies for the entirety of 2013: the Green Alpha Next Economy Index (or GANEX), the Sierra Club Green Alpha Portfolio, and the Green Alpha Growth and Income Portfolio. The full year returns for each were:
- GANEX: 63.08%
- Sierra Club Green Alpha: 99.80%
- Green Alpha Growth and Income: 32.16%
Each of these portfolios behaved according to their planned and theoretical risk/return profile expectations this year, with results coming in with strong correlation to their expected volatility.
The Green Alpha Next Economy Index is our most comprehensive portfolio, constituting our attempt to represent the benefits of sustainable economics from all sectors, all in one place. In 2013, GANEX was invested in 77 companies in 28 sectors. To give some indication of the diversity and velocity of the advancement of our next-economy firms, consider the top 16 performers among GANEX held stocks in 2013:
- Canadian Solar Inc (CSIQ) 777%
- SunPower Corporation (SPWR) 430%
- Vestas Wind Systems (VWDRY) 421%
- SolarCity Corporation (SCTY) 376%
- JinkoSolar Holding Co., Ltd. (JKS) 372%
- Tesla Motors Inc. (TSLA) 344%
- Orion Energy Systems, Inc. (OESX) 310%
- Sunedison Inc (SUNE) 307%
- Trina Solar Limited (TSL) 215%
- Sierra Wireless, Inc. (SWIR) 204%
- Kandi Technologies Group Inc. (KNDI) 195%
- GT Advanced Technologies Inc. (GTAT) 189%
- Yingli Green Energy Hold. Co. Ltd. (YGE) 115%
- JA Solar Holdings Co., Ltd. (JASO) 115%
- Trex Company, Inc. (TREX) 114%
- Consolidated Water Co. Ltd (CWCO) 95%
These performers represent industry diversification including water desalination, waste-to-value building materials, machinery, electric vehicles, mobile communications, and machine-to-machine Internet, energy efficiency and lighting, and wind power. The very diversity of this group shows that market share is now preferentially accruing to firms across economic sectors that are providing solutions to the issues with potential to disrupt our climate, economies and our ways of life.
You no doubt note that several of the top GANEX contributors were firms at various places along the solar value chain. In our minds, this is as it should be. Solar energy is available nearly anywhere, easy to deploy, not necessarily dependent on local infrastructure, inexpensive and getting cheaper at a rapid and dramatic rate, and is clearly the frontrunner in the race to be civilization's next primary energy source. As solar grows from one percent of our global energy mix to two percent to 10 percent and far beyond, the better-managed companies poised to deliver in the space almost can't help but grow. As Vinod Khosla has speculated, renewable energy will ultimately feature tens of Google-sized companies. It was great to see some general market recognition of this reality in 2013. Several of our favorite solar selections showed improving profitability, improving potential growth indicators and generally favorable macroeconomic vectors, and as a result finally began to realize market prices above their tangible book values. Yet many still remain far below average price-to-book of the S&P 500 or even the energy industry, so even in the near-term, we see more upside potential.
As a reminder, though, the GANEX does invest economy-wide, and solar energy represented 12.35% of the portfolio as of December 31, 2013. People will always need responses to the key risks they face, and when these best mitigation ideas are also the main drivers of economic efficiency gains and wealth creation, the result is a constellation of companies with very favorable growth potential. The idea that "green" or "cleantech" can only refer to energy is too narrow, and not representative of reality.
Key Green Alpha events in 2013
In 2013, we were pleased to partner with Shelton Capital Management to offer Green Alpha's first mutual fund, the Shelton Green Alpha Fund (ticker NEXTX), launched March 12, 2013. NEXTX is both a new investment vehicle and a new strategy for us within the realm of our sustainable economics philosophy. In terms of risk/return profile, NEXTX is somewhat more conservative than our GANEX strategy.
NEXTX allows us to bring our thesis to the broad market via a low minimum investment ($1,000) as well as the opportunity for us to participate in the retirement plan marketplace. We are very proud and excited about the opportunities that the launch of NEXTX has brought to Green Alpha.
From the March 12, 2013 inception date through the end of the year, NEXTX returned 48.4%. For performance and category ranking information, visit the NEXTX MorningStar page.
NEXTX has also been recognized by 350.org, gofossilfree.org and Green America as a broad based portfolio that does not contain the equities of fossil fuels companies. All Green Alpha portfolios have always been entirely fossil-fuel free; as we recently wrote in a piece on how we go about constructing fossil-free portfolios, "fossil fuels, which have the power to disrupt the indefinite thriving of both economies and ecosystems, and which are the cause of many key threats, do not represent solutions to our more daunting challenges. Therefore, they have no place in our portfolios. So, at Green Alpha, we have never considered having fossil fuels in our portfolios. For us, there has never been a question of divesting from fossil fuels, because there has never been the possibility of investing in them."
Also in 2013, we were pleased to welcome new partner, employee and team member Robert Muir. Robert joined in August 2013 as a Senior Vice President and his responsibilities include research, operations, trading operations and business development. Or, put another way, pretty much everything. Robert has already proven to be an indispensable member of the team, and we are honored he decided to join us and bring his expertise and passion to Green Alpha.
2014 events and outlook
We're excited about several developments for 2014. First, we're happy to announce the addition of our new Director of Marketing and Communications, Merideth Parfet, as of January 1, 2014. Meredith, who runs her own marketing consulting group, Practika Marketing, LLC, comes to us with extensive experience in marketing, financial services, philanthropy, public relations, and communications. We welcome Meredith and look forward to her contributions.
Also in 2014 we're adding two new portfolio strategies, the Green Alpha Global Equity Income Portfolio (GAGEIP for short), and the Green Alpha Select Solar Portfolio (or GASSP).
The Green Alpha Global Equity Income Portfolio is an all-equity dividend income producing portfolio comanaged by our friend and colleague Tom Konrad. Tom is a portfolio manager, economist and journalist contributing to Forbes, Seeking Alpha and AltEnergyStocks.com, among others. Through select green economy stock picks and some options positions, the GAGEIP portfolio will seek to realize annual dividend yield in the five to six percent range. GAGEIP is currently available as a separate account strategy at Charles Schwab & Co., Inc.
The Green Alpha Select Solar Portfolio is managed by Green Alpha, and is a basket of what we believe to be the companies from across the solar energy value chain that represent the highest growth potential and/or the best market prices relative to actual valuation as we calculate it. GASSP is an aggressive growth sector portfolio, currently available as a model on the Folio Institutional platform.
When it comes to specific predictions for the near term (such as the immediate calendar year) we tend to tread carefully, and agree with Peter Lynch, who once remarked in an interview with PBS' Frontline that investing with a one-year time horizon is "just like betting on red or black at the casino... What the market's going to do in one or two years, you don't know." We believe in investing in the best companies we can find in terms of fundamentals like strong balance sheets, good growth metrics, low current valuations, and strong management teams, that are also on the frontier of sustainability, and holding them indefinitely or until one or more of the above criteria changes. Making short-term bets on red or black is not something we agree with.
In taking this long-term view, we think it's important to realize that societies are increasingly clamoring for solutions to their potentially existential threats, and the solutions that also accelerate the economy will over time continue to build market share at the expense of traditional ways of business in providing energy, conducting commerce, manufacturing, sourcing materials, and so on. Subsequently, we continue to like our chances of earning competitive market returns over the long term. As we put it in last year's letter: "Earth's economies may stagnate or grow; either way, we believe things like renewable energy, clean transportation, sustainable infrastructure and water resources must grow in value. Over time, the value of stocks in our models will not be dependent on Wall Street gamesmanship, but on simple necessity. As awareness of the magnitude of our growing resource-climate-security problems advances, so will the valuations of our portfolio companies."
It is on this basis that we think that in 2014 and beyond, you'll see the better companies (in terms of fundamentals) that are working toward tandem economic and environmental sustainability have strong relative performance as what Goldman Sachs, the World Bank, and others have called the "inevitable shift towards a sustainable economy" continues to advance.
Next-economy portfolios, in our context, mean those invested in leaders bringing about an economic system wherein both world societies and the underlying ecosystems that support us can continue to thrive indefinitely. We can't think of a better place to be working or to be investing our careers alongside your and our assets.
A big thank you to all: clients, partners, colleagues and everyone working to advance a truly sustainable economy. We couldn't have founded Green Alpha without you, and we wouldn't be here today without your support.
Garvin and Jeremy
Garvin Jabusch and Jeremy Deems are the cofounders of Green Alpha® Advisors, LLC. They comanage the Shelton Green Alpha Fund (NEXTX), the Green Alpha Next Economy Index, and the Sierra Club Green Alpha Portfolio. Garvin also authors the Sierra Club's green economics blog, "Green Alpha's Next Economy."