To our Clients, Partners and Friends:
Obviously it’s been a tough recent time in the markets. The Green Alpha Portfolios have not been immune, and we’ve seen significant pullbacks, especially as some of the largest declines globally have been in the tech and energy sectors, two of our areas of focus. (Fortunately, we have had relatively low exposure to financials and commodities, the other two big decliners.)
So what’s going on? The usually-cited culprits are slowing Chinese growth, Eurozone GDP, and the latest gyrations in gold. These things all sound scary, and over the short term they can be. But that’s the thing, they are but short- to medium-term drivers of markets, as history has shown us over and again. For us, the ongoing, inevitable transition to the highly economically productive and therefore ultimately regenerative Next Economy is a long-term evolution that sweeps away the ephemera of things like interest rates and bond prices. And so we recognize: existential risks like global warming and resource scarcity are investing risks; existential solutions, equally, are investing opportunities. Where incumbent economy stocks have traded historically is increasingly irrelevant: the world has changed. And as we invest for that change, we assimilate Next Economy analog companies for every incumbent economy function we can identify (solar replacing coal as one obvious example). And that is what we will continue to do.
Our portfolio decisions at Green Alpha are driven by what we believe will mitigate risk and improve opportunity for long-term returns, so while our stock universe is well diversified among 9 BICS sectors and 24 sub-industries, we do that diversification via a risk-factor allocation, as opposed to starting with a desired sector-specific allocation. The way we think about economics, Next Economics provides a basis for evaluating large-scale risk factors going forward, as opposed to incumbent-economy oriented risks around traditional macro (like bond yields, etc.). And so having been determined by risk-factor allocation, instead of sector or momentum allocation, both our buy and sell disciplines are governed by macroeconomic and company-specific fundamentals, and not by short-term share price volatility. On the contrary, our reaction to price declines that are not supported by deteriorating fundamentals has been to acquire more shares at bargain prices. As Matthew Yglesias put it on vox.com over the weekend, “If you’re not planning to retire for another two or three or four decades then cheaper stocks are, if anything, a plus — it means your savings will go further as a long-term investment.” Exactly.
Pundits who conclude that the old economic notion of indefinite growth can’t be supported if the globe is ever to achieve sustainability may be right. But we’re so far from a global economic system that can realize that world that the sectors and technology that will enable it will have to receive a disproportionate share of all investable assets over the next two to four decades. Indeed, as reported today in GreenTech Media, “the needed level of investment in energy in the coming decades is staggering, no matter what resources take priority. Citi estimates that between 2015 and 2040, its Action and Inaction scenarios will require spending $190.2 trillion and $192.0 trillion, respectively.” We think Citi is right, and further, we think fossil fuels and other legacy economy technologies will prove no match for that level of investment.
So in investing in a near future economy, wherein our real economically and ecologically systemic risks are being addressed, we think we’re buying wisely as the globe develops systems that run the world without overtopping its capacities or colliding with big, foreseeable problems. And so we stand for, as our best science tells us we must, the decoupling of economic growth from environmental degradation. Short-term price volatility, in either direction, will never change our approach. We will hew closely to our thesis, rain or shine, and we believe that patient share owners – including everyone who works here at Green Alpha – will be rewarded as the transition to the Next Economy unfolds.
Thank you all for your continued business and support. We love working on the Next Economy, and we couldn’t do it without you.