By Garvin Jabusch.
In a world of polycrisis and rapidly evolving financial landscapes, investors are increasingly seeking strategies that not only deliver superior returns but also address pressing challenges. At Green Alpha Investments, we’ve developed a unique approach to active portfolio management that does just that. Our strategies are built on three fundamental pillars that differentiate us from traditional investment approaches.
1. Long-term Competitive Performance
Our primary goal is to generate long-term returns that surpass market averages. We achieve this through rigorous research, a deep understanding of emerging trends and technologies, and strategic stock selection. By identifying companies poised for growth in sectors critical to the future economy, we aim to deliver value that exceeds benchmark expectations.
Proven Track Record: Next Economy Select Strategy
Our commitment to outperformance is a demonstrated reality. Take, for example, our Next Economy Select strategy, which is reflected in our ETF, the AXS Green Alpha ETF(ticker: NXTE). Since its inception on March 31, 2013, through July 31, 2024, this strategy has delivered:
- An average annual return since inception, of 14.05% gross of management fees, 12.69% net of fees. Please see below for additional performance returns.
- This outpaces its stated benchmark, the MSCI ACWI IMI, which returned 9.87% over the same period.
These results underscore our ability to identify and invest in companies that not only contribute to a more sustainable future, but also deliver superior financial performance.
| Since Inception 3/31/2013-7/31/2024 | Trailing 10 Years Annualized | Trailing 5 Years Annualized | Trailing 1 Year Annualized | |
|---|---|---|---|---|
| Next Economy Select gross mgmt fees | 14.05% | 11.44% | 15.44% | 1.00% |
| Next Economy Select net mgmt fees | 12.69% | 10.13% | 14.23% | 0.02% |
| MSCI ACWI IMI | 9.87% | 9.09% | 11.22% | 16.87% |
Unconstrained by Benchmark Tracking Error
A key advantage of our approach is that we’re not constrained by tracking error (a measure of how closely the portfolio’s performance aligns with its chosen benchmark over time). This freedom allows us to purchase stocks not included in indexes, enabling us to invest in great companies wherever we find them, without worrying about the impact on short-term relative volatility.
We can do this because we don’t equate short-term share price volatility with economic risk. This perspective has led us to identify and invest in numerous exceptional companies years before they were added to major indices like the S&P 500. As a result, our clients have benefited over the long term as these stocks grew and eventually gained wider recognition.
Here are some examples of companies we invested in well before their inclusion in the S&P 500:
- Tesla (TSLA)
- Green Alpha purchase 2010
- S&P 500 admission 2020
- Arista Networks (ANET)
- Green Alpha purchase July 2018
- S&P 500 admission August 2018
- Crowdstrike Holdings (CRWD)
- Green Alpha purchase 2023
- S&P 500 admission 2024
- Moderna (MRNA)
- Green Alpha purchase 2019
- S&P 500 admission 2021
- Monolithic Power Systems (MPWR)
- Green Alpha purchase 2018
- S&P 500 admission 2021
- ANSYS (ANSS)
- Green Alpha purchase 2013
- S&P 500 admission 2017
- First Solar (FSLR)
- Green Alpha purchase 2008
- S&P 500 admission 2022
- Alexandria Real Estate Equities (ARE)
- Green Alpha purchase 2014
- S&P 500 admission 2017
- Fortinet (FTNT)
- Green Alpha purchase 2016
- S&P 500 admission 2018
This ability to identify promising companies early is a significant advantage available only to active investment managers who don’t attempt to correlate with their benchmark. It is a direct output of our forward-thinking approach and our commitment to finding the best opportunities, regardless of current index compositions.
A Unique Perspective on Active Share, or, Green Alpha’s Active Share is Declining – But Not for the Reason You Might Think
Active share is a measure used in portfolio construction to assess how much a portfolio’s holdings differ from those of its benchmark index. It represents the percentage of a portfolio’s holdings that deviate from the benchmark. A portfolio with an active share of 100% holds no overlapping stocks with its benchmark, indicating a highly active management strategy, while an active share of 0% would indicate a fully passive strategy that replicates the benchmark. Across strategies, Green Alpha’s active share is in the 90s, and often as high as 97%.
Interestingly, while our active share remains high, it has declined slightly over time. However, this decline is not due to us purchasing more S&P 500 stocks. Rather, it’s because the companies we’ve invested in are increasingly being added to the S&P 500.
This trend highlights two crucial aspects of our strategy:
- Foresight in Stock Selection: Our ability to identify companies with high growth potential and innovative solutions to global challenges often predates their recognition by major indices.
- Validation of Our Approach: As these companies are added to the S&P 500, it serves as a form of external validation for our investment thesis and stock selection process.
This unique situation demonstrates that we’re not just differentiating for the sake of being different. Instead, we’re identifying tomorrow’s market leaders today, often years before they become widely recognized. As these companies grow and gain inclusion in major indices, our clients benefit from both the growth phase and the increased attention that comes with index inclusion.
2. Addressing Global Systemic Risks: Investing in an Economy of Abundance
At Green Alpha Investments, we believe that addressing global systemic risks is not just about mitigating potential negative impacts—it’s about actively investing in the creation of a more sustainable and abundant future for all.
Envisioning a Post-Scarcity World
Our investment thesis is rooted in the ambitious goal of fostering an economy of abundance—a post-scarcity world that can thrive without exceeding our planet’s ecological boundaries. This vision may seem utopian, but we believe it’s not only possible but necessary for the long-term prosperity of both our clients and society at large.
Key aspects of this vision include:
- Unprecedented Productivity: We seek out companies that are dramatically increasing economic productivity, whether measured in monetary output, resource efficiency, or human labor. This increased productivity is the cornerstone of creating abundance without depleting our planet’s resources.
- Technological Innovation: We invest in firms at the forefront of technological breakthroughs that can revolutionize industries, making them more efficient and less resource intensive.
- Circular Economy Solutions: Companies that design out waste, keep materials in use, and regenerate natural systems are prime candidates for our portfolios.
- Renewable Energy and Clean Tech: Firms leading the transition to clean, renewable energy sources and developing technologies to reduce our environmental footprint are crucial to our investment strategy.
- Biotechnology and Health Innovations: We look for companies working on solutions to reduce the global disease burden and increase human wellbeing, contributing to a more productive and prosperous society.
Balancing Abundance and Planetary Boundaries
Our approach recognizes that true abundance cannot come at the cost of environmental degradation. We carefully select companies that are:
- Developing solutions to operate within planetary boundaries
- Increasing resource efficiency and reducing waste
- Creating products and services that enhance human wellbeing without excessive resource consumption
By focusing on these areas, we aim to invest in a future where economic growth and environmental sustainability are not mutually exclusive, but mutually reinforcing.
The Economic Imperative
We believe that the transition to an economy of abundance within planetary boundaries is not just an environmental or social imperative—it’s an economic one. Companies that can innovate and thrive in this new paradigm are likely to be the market leaders of tomorrow, offering potentially superior returns for our investors.
This approach to systemic risk mitigation through proactive investment in abundance-creating technologies and business models sets us apart from traditional risk management strategies. Rather than simply avoiding risks, we’re investing in solutions that can create a more resilient, prosperous, and sustainable global economy.
Investing in Abundance: From the Obvious to the Cutting-Edge
Our investment strategy spans a wide range of sectors and technologies, each contributing to our vision of an economy of abundance within planetary boundaries. Here are some examples of the areas we focus on:
- Renewable Energies: This is perhaps the most obvious sector in our portfolio. Companies leading the transition to solar, wind, geothermal, and other renewable energy sources are crucial for creating a sustainable energy abundance that can power our future economy without depleting finite resources or contributing to climate change.
- Zero-Emission Transportation: Another focus area is companies developing electric vehicles, advanced batteries, charging infrastructure, and other technologies that are revolutionizing the transportation sector. These innovations are key to reducing emissions while increasing mobility and accessibility.
- Biotechnology and Gene Editing: Moving into less obvious but equally crucial areas, we invest in biotech companies that are pushing the boundaries of what’s possible in medicine, agriculture, and materials science. For example:
- Medical Applications: Companies using gene editing to develop treatments for previously incurable diseases, potentially dramatically reducing the global disease burden.
- Agricultural Innovations: Firms creating more resilient and productive crops that can thrive in changing climatic conditions, contributing to food security and abundance.
- Advanced Materials: Biotech companies developing sustainable alternatives to traditional materials, such as bioplastics that could eventually replace petrochemicals, reducing our dependence on fossil fuels and minimizing pollution.
- Artificial Intelligence and Machine Learning: We invest in companies leveraging AI to increase productivity across various sectors, from optimizing energy grids to improving drug discovery processes.
- Advanced Manufacturing: Companies pioneering technologies like 3D printing and advanced robotics that can dramatically increase production efficiency while reducing waste.
- Water Technology: Firms developing solutions for water purification, desalination, and efficient irrigation systems, addressing one of the most critical resource challenges of our time.
- Circular Economy Innovators: We seek out companies that are reimagining product lifecycles, creating closed-loop systems that minimize waste and maximize resource efficiency.
By investing across this diverse range of sectors, we’re not just betting on individual technologies or companies. We’re investing in an interconnected ecosystem of innovations that together have the potential to create a more abundant, sustainable, and prosperous world.
Our approach recognizes that the path to a post-scarcity economy within planetary boundaries will require transformation across all sectors of the economy. By identifying and investing in the companies leading this transformation—from the obvious to the cutting-edge—we aim to generate superior returns for our clients while contributing to a better future for all.
3. Innovation, Competitiveness, and Growth
Our investment philosophy goes beyond mere problem-solving. We seek companies that are:
- Highly innovative relative to their industry peers
- Economically competitive in their respective markets
- Growing faster than the underlying GDP
This focus on innovation and competitiveness ensures that our portfolios comprise companies that are not just surviving, but leading the charge in their sectors, driving progress and creating value.
Beyond Traditional Benchmarks
As demonstrated by our early investments in companies later added to major indices, our investment strategies are not constrained by traditional benchmark correlations. We believe that the challenges and opportunities of the future require a fresh perspective, one that may diverge from established indices. This approach allows us to capture value in emerging sectors and technologies that may be underrepresented in conventional benchmarks.
As evidenced by the performance of our Next Economy Select strategy and our track record of identifying future index components, this approach can lead to returns that outpace even broad market indices like the S&P 500.
The Convergence of Innovation, Risk Mitigation, and Superior Returns
At Green Alpha, we recognize a powerful truth that has been consistent throughout economic history: the world’s greatest innovators have always been the primary source of wealth creation. From the industrial revolution to the digital age, those at the forefront of innovation have consistently delivered superior returns to investors who recognized their potential early.
Today, we find ourselves at a unique juncture where this timeless principle of investing in innovation converges with an unprecedented global imperative: the need for systemic risk mitigation in the face of climate change, resource scarcity, and other planetary challenges.
The Innovation Imperative
Innovation has always been the engine of economic growth and wealth creation. Companies that can create new markets, revolutionize existing ones, or solve problems in novel ways have consistently outperformed their peers. Our strategy is rooted in identifying these innovators across various sectors, from renewable energy and biotechnology to artificial intelligence and advanced materials.
The Risk Mitigation Tailwind
What sets the current era apart is the added tailwind of mandatory risk mitigation. As the world grapples with existential challenges like climate change and resource depletion, there’s an increasing recognition that addressing these issues is not just an ethical imperative but an economic necessity. This creates a powerful tailwind for companies providing solutions to these global challenges.
Regulatory pressures, changing consumer preferences, and the need for resilience in the face of environmental and social upheavals are all driving capital towards innovative companies that can thrive in this new paradigm. This trend amplifies the potential returns from investing in these forward-thinking firms.
Benchmark-Agnostic Stock Selection
Our approach to capturing these opportunities is fundamentally different from traditional investment strategies. By freeing ourselves from the constraints of benchmark tracking, we can identify and invest in the most promising innovators, regardless of their current market cap or index status.
This benchmark-agnostic approach allows us to:
- Invest early in companies with high growth potential before they become widely recognized
- Maintain higher-weight positions in our highest-conviction investments
- Explore opportunities in emerging sectors that may be underrepresented in traditional indices
- Avoid legacy benchmark-included companies that may face existential risks in a rapidly changing world
The Result: Potential for Competitive Portfolio Returns
The combination of these factors—investing in the best innovators, capitalizing on the risk mitigation tailwind, and employing a benchmark-agnostic approach—provides an excellent opportunity for very competitive portfolio returns over time.
Our track record of identifying companies before their inclusion in major indices is a testament to the effectiveness of this approach. As these companies grow and gain wider recognition, our clients benefit from both the initial growth phase and the increased attention that comes with index inclusion.
Moreover, by focusing on companies that are addressing global systemic risks, we’re investing in firms that are positioned to thrive in the long term. These are the companies creating solutions for the challenges of tomorrow, and as such, they have the potential to deliver sustained growth and returns.
We believe that the convergence of innovation-driven investing, the tailwind of mandatory risk mitigation, and our benchmark-agnostic approach creates a powerful formula for potential outperformance. We invite you to join us in investing in the companies that are not just preparing for the future, but actively shaping it—companies that have the potential to deliver competitive returns while contributing to a more sustainable and abundant world for all.
Disclosures:
- Green Alpha Advisors, LLC is a registered investment advisor. Registration as an investment advisor does not imply any certain level of skill or training.
- Green Alpha Investments is a trade name of Green Alpha Advisors, LLC. Green Alpha is a registered trademark of Green Alpha Advisors, LLC. Green Alpha Advisors also owns the trademarks to “Next Economy,” “Next Economics,” “Next Economy Portfolio Theory,” “Investing in the Next Economy,” and “Investing for the Next Economy.”
- Performance quoted throughout this document represents past performance. Past performance does not guarantee future results, and current performance may be lower or higher than the data quoted. Investment returns and principal will fluctuate with market and economic conditions, and investors may have a gain or loss when shares are sold.
- Beginning May 31, 2023, composite membership includes a minimum account size of $100,000. Next Economy Select performance results reflect actual performance for a composite, net of actual management fees and transaction costs. Some assets managed in the Next Economy Select strategy within the composite receive a reduced fee from the standard fee schedule. Actual client returns experienced will vary from the composite returns based on a variety of factors, and we encourage you to ask about specific factors. Accounts are included in the composite for full-month periods under management with Green Alpha Investments. Next Economy Select performance results do not reflect the reinvestment of dividends and interest. Extreme periods of underperformance or outperformance are due to the concentrated nature of the strategy and the impact of specific security selection. Such results may not be repeatable.
- From the strategy’s inception through June 30, 2021, performance data are sourced from Bloomberg Finance L.P. Beginning June 30, 2021, the composite and all performance results are maintained and calculated by Green Alpha’s portfolio accounting system Advent APX.
- The holdings identified throughout this document do not represent all the securities purchased, sold, or recommended for advisory clients. You may request a list of all recommendations made by Green Alpha in the past year by emailing a request to info@greenalphaadvisors.com. It should not be assumed that the recommendations made in the past or future were or will be profitable or will equal the performance of the securities cited as examples in this document.
- This presentation is for informational purposes only, and should not be construed as legal, tax, investment, or other advice. This presentation does not constitute an offer to sell, or the solicitation of any offer to buy, any security. Any mention of an individual security is for illustrative purposes only and should not be considered a recommendation to buy or sell any security. The presentation does not purport to contain all of the information that may be required to evaluate Green Alpha Investments and its investment strategies.
- The AXS Green Alpha ETF (NXTE) is distributed by ALPS Distributors, Inc., which is not affiliated with AXS Investments or Green Alpha Advisors. There are risks involved with investing, including possible loss of principal. Investors should carefully consider the investment objectives, risks, charges, and expenses of the fund before investing. Please see the Fund’s website for important documents, such as the prospectus, and contact information to learn more about the AXS Sustainable Income Fund. A prospectus should be read carefully before investing.