COVID-19 fears, a 30% plunge in the oil price, and a background of producer (if not yet consumer) struggles in the face of trade conflict came together yesterday to cause one of the worst one-day routs of major markets in recent memory. Selling in the previous few sessions meant that the S&P 500 Index (reminder: consists simply of the largest 500 U.S.-domiciled companies that qualify) has retreated back to where it was at approximately this time last year. Through yesterday’s market close, major indices’ year-to-date returns were:
- S&P 500 Index: -14.68%
- MSCI All Country World Investible Market Index (MSCI ACWI IMI):-15.56%
- Russel 2000 Index: -21.12%
Obviously pretty steep declines; however, the fact that at last night’s close the S&P 500 was approximately at price parity with just one year ago shows how strong the bull market has been. How have Green Alpha’s portfolios compared? We’re pleased to note that, so far, they have exhibited relatively good downside protection versus major indices, with year-to-date returns summarized as follows:
- Sierra Club Green Alpha: -9.01%
- Next Economy Select: -9.23%
- Growth & Income: -9.64%
- Next Economy Index: -10.36%
- Social Index: -10.57%
We believe one reason for this down-market protection is our attention to fundamentals. Specifically, we look to invest in companies that are careful stewards of capital. As we wrote in our Worth magazine column yesterday, “reduced expectations and real results manifest in capital effects like reduced revenues and cash flow, and so, in downgraded credit ratings. If you are one of these downgraded companies, your cost of capital just went up. This is a second-order drag effect from COVID-19, but one that not all companies share. Companies that during the recent bull rally spent a lot of their free cash flow in less-productive ways, such as share buybacks, will find themselves with a suboptimal capital mix (less cash and/or more debt) during the bear’s run. The rainy day is here, and this reduced access to capital will slow growth (and the pace of buybacks) for these companies…[Meanwhile}, companies that were able to weather the storm because of smart use of capital will demonstrate better revenue and earnings results as global growth resumes. These companies will grow faster by gaining market share from their competitors who are now faced with reduced and/or more costly access to capital.”
At Green Alpha we don’t change our investment philosophy or process for short-term volatility. We use it for the investment opportunity that it is – adding to high-quality, growing companies in expanding industries at attractive entry prices. We look for innovation leaders that carefully manage their capital during good times and bad, that are also working to lower the overall risk profile of the globe in terms of the risks that matter: the climate crisis, resource degradation, and worsening inequality.
We firmly believe that no investment portfolio should contain the cause of global systemic risks, and we have never purchased fossil fuels or service providers, or even carbon-exposed industries like utilities that rely on oil, coal, or natural gas, or makers of internal combustion engines, for our clients. Legacy businesses like these represent neither innovation nor risk mitigation, and investing in them isn’t a prudent way to preserve and grow wealth.
Our job is to carry out rigorous research and portfolio construction processes that assess long-term risks and opportunities to help clients preserve and grow their wealth. If you follow our work, you already know that we strongly outperformed the market across all of our core portfolios through 2019 (indeed, we were still posting positive year-to-date returns through February 28, 2020 while major indices had turned negative year-to-date by then), thus we are delivering on the “growing client wealth” portion of our responsibilities. So far in 2020 we have delivered on the “preserving wealth” portion of the equation, as is summarized above.
Our clients hire us to hold firm to proven economics and methods of investing in both times of short-term volatility and strong up-markets. You can rest assured that we will always hew close to our thesis, and invest in the smartest, most innovative companies that are prudent capital managers and whose business is to help solve the risks to us all.
Thank you for being clients and industry colleagues. We look forward to many more years of growing together.
The Green Alpha Team
To better understand the indices, portfolios, and the performance results discussed in this commentary, please read these important disclosures.