Investing in the Next Economy

This interview podcast and video are with Garvin Jabusch, Green Alpha Advisors about investing in the next economy.

Here is the transcript of this episode:

In this episode I’m gonna interview
Garvin Josh from the green alpha
advisors firm they have an interesting
investment strategy based on the next
economy this is the impact financial
planners podcast with Bill holiday
making sustainable responsible impact
investing easy for socially conscious
investors who want to make a positive
change in society through their
investments this is brought to you by AIO
old financial the only fiduciary
financial planning firm specializing in
sustainable responsible impact ESG
investing at AIO financial calm alright
thank you for joining me in this episode
I’m really glad to have Garvin here he
is the chief investment officer for
green alpha advisors he co-founded Green
alpha in 2007 he leads the investment
research conducts macroeconomic
scientific and technological analysis
and develops communication it develops
and communicates the next economy
investment approach he spoke at a recent
conference that I attended about
socially responsible investing he is
quite a long background in investing I
just hit a couple highlights he
previously worked for forward management
where he managed the Sierra Club stock
fund and Sierra Club equity Income Fund
he was vice president of strategic
services at Morgan Stanley he was a
whitewater rafting guide has an MBA you
could check out his by on his site for
more details but he he knows what he’s
doing
he’s also a physical anthropologist and
archaeologist so uh yeah he’s got a
diverse background alright let’s go to
the interview
Garvin thanks a lot for joining me yeah
thanks Bill I guess let’s start I just
wanted a little introduction to green
alpha you know just what do you offer
and maybe even a little history sure and
if I go on a little long just just cut
me off
I mean you really open a can of worms
when you ask about history no not not
really you know we’re an asset manager
as you know and we offer several
different strategies all long only
public equities and they are all based
on the same thesis we call our thesis
next economics and we call it practical
application next economy portfolio
theory and the idea there is and here
I’ll give the little bit of history is
that we perceived my co-founder Jeremy
Dean’s and I a few years back we
perceived that the way that
sustainability focused equity investing
was only addressing about half the
picture it was at that time and by it by
at that time I mean you know in 2007 it
was really still very much focused on
negative screening and the problem with
that was is that while it does get rid
of whatever company’s a client finds
objectionable it still leaves you with
whatever is left in say whatever
benchmark index that you’re attempting
to track it leaves you with whatever is
left in there it’s very much a process
of starting with your index that you
hope to two-track or have low tracking
error with and take out what you don’t
like and then just invest in what’s left
and we thought well the reason that
exists is because you know bills you
know very well in our industry Modern
Portfolio Theory rules the day and what
that says is or at least as folks
practice it nowadays I’m not sure
Markowitz would agree but what that says
is that low tracking error with the
index is the gold standard of measuring
risk and whatever your benchmark is make
sure you track it pretty well beat it by
a little bit track it pretty well and we
realized that what that is doing is
limiting our exposure to what’s next in
sustainability it’s at once preventing
us from really investing in what’s next
and on the other hand it’s keeping us
exposed to a lot of stuff in the legacy
economy even if we’re doing negative
screening so for next economy portfolio
theory we thought you know what if we
approach the whole thing a little bit
more like adventure capitalists would
even though we’re in the public equity
space meaning let’s look for things that
are solving an unmet need that are going
to be solving for a big systemic risk
that are doing so in a way that is more
competitive than its legacy economy
predecessor or counterpart and that can
be done to the benefit of its owners
meaning the shareholders so really going
after what’s smart what is increasing
productivity what’s gonna work best and
what’s going to solve our big problems
okay can I just when you’re saying it’s
it’s a little difficult in the ESG esri
world to track an index yeah you’re
saying that if the index is the S&P 500
and it has at 11% in energy then by
eliminating fossil fuels were way
underexposed so that we load up on
something else to fill that gap it may
is that kind of problem yeah that that’s
yeah bill that’s exactly that’s exactly
the problem we we thought we were
confronting you know put another way
sometimes I like to say that the what I
think it was the old-fashioned way of
doing SR IR ESG investing was grabbing
an index and then trying to Frankenstein
it into something more green as opposed
to starting with a blank sheet and
building up a portfolio of what the
sustainable economy looks like in so
your portfolios I mean how do they are
they over weighted in different I mean I
don’t even know energy or transportation
or how do they compare it’s just yeah
way different um not as different as you
might think we actually managed to find
really great diversification even within
companies that are not causing systemic
risk and that are seeking solutions to
those risks there are a lot of companies
out there doing some amazing stuff and
you know we have an index of 120
companies that is relatively well
diversified but that said you’re right
you know our active share versus S&P 500
is 97 percent you know we don’t overlap
much with it at all and we don’t attempt
to part of that is we don’t believe you
can correlate with the legacy economy
and still
appropriate portfolio exposure to what’s
coming next your companies or your
portfolio would have a lot more small
caps to than an S&P because you’re
you’re giddy ax companies that are
trying to put something new out there
yeah they’ll we you know Morningstar
call this Mid Cap but the truth is were
all cap we do go right down into the
micros and right up into some of the big
guys so not having an all cap category
Morningstar just kind of throws up its
hands and says well okay you’re mid cap
but you’re right we do we have some
smalls we have quite a few mins and we
do have some larges even a couple of
Megas and to get back to your previous
question we find that we do have more
weight than most major benchmark indices
in tech we definitely have more in
renewable energies energy overall we
find that we’re either a kind of in
there with the indices or maybe a little
bit more we do think that renewal
renewable energies if you’re careful and
have and have a value based approach and
and therefore pick what I would think of
as the right ones in that area I do have
a long bright future ahead of them as
solar goes from you know for example
wind to but as solar goes from you know
1% of the global energy mix to 50
percent over the next 30 years
obviously there’s a ton of greenfield
and growth ahead of that industry again
if you’re smart with your picks
you can’t just indiscriminately by solar
right now because it’s a little bit of a
maze but as long as you’re careful I
think there’s just a fantastic
opportunity there so we do tend to have
more weight in some areas than others
and then the other tricky thing with
that is how do you measure what industry
you’re even in you know SP 500 uses gigs
the the global industry classification
system
well according to gigs you don’t even
have energy exposure if you’re not
burning something to make the energy so
our solar and wind exposure according to
geeks looks like a technology well
that’s fine but it doesn’t look very
good on the pie chart it makes us look
way overweight on technology I’m Way
underweight on energy so we we find that
we like the bloomberg industry
classification scheme better and that’s
what we use on our facts
and such because they do make that
differentiation there may be a little
bit more forward looking than the
old-school Dix is so it’s interesting by
by what yard sticker are you even
measuring those things in so I saw you
have five or six different offerings
yeah and are those there looked like one
mutual fund in five separate account
strategies are they similar strategies
and actually how do you even access them
I didn’t see where they held or what can
they be purchased sure so I’ll take
those in reverse order just because
that’s what it comes to mind the mutual
fund of course any XTX
can be purchased on any brokerage
platform or via your advisor or anywhere
you combine can buy a normal forty act
fund right little bit Schwab or fidelity
or vengo just wherever just wherever
Jeff our separate strategies are on
about about I believe seventeen
different platforms now and accessible
there so oh we like the ones where we
can set up models and manage the weights
so we we love when folks want access to
our models on folio institutional but
we’re also they’re also available in
Morgan Stanley they’re also at Schwab
and we can we can open up separate
account client accounts on lots of
different platforms the best thing to do
to to find out if we’re available on
your platform is just drop us an email
and we’ll work with you I didn’t realize
so I know folio you’re kind of this
overlay yeah and it does this filter
into the account ends up being all the
individual stocks that’s right is that
Schwab does the same thing
no and Schwab we have we have to trade
the accounts individually in the case of
a separate account so you just open a
separate account in then it’s under your
management there yep and then we trade
it to mirror our model which would then
look like the same model you would get
on folio but more manually traded by our
OMS as opposed to just folio doing it in
an automated way gotcha so that’s one
reason we try to point
folks to folio instead of one of the
other platforms and unless they are
particularly wedded to the platform
where they where they already are with
their other accounts so if they’re
already a Schwab person well then that’s
that’s understandable and we’re happy to
work with someone on Schwab but if they
are agnostic to platform we prefer to
point them towards folio because because
it’s automated we’re able to get their
overall fee down a little bit
oh because of the trading costs the
folio does it differently yep oh and
folio suit just has lower custody fees
than most of the big banks gotcha oh
that’s good to know that I’m kind of new
this year to the folio system I hadn’t
heard of that before where you just
overlay and have the stocks it’s it’s
pretty slick it is it is you know so
every time we change one of our models
in one of our five separate account
strategies we simply upload that update
to folio and it takes care of all the
accounts that where we are listed as the
manager underneath so it’s really very
slick and convenient and we can do it
therefore for a relatively low cost
gotcha and then your portfolio’s are
those do they very much I mean they’re
all new economy so I’d imagine there’s
quite a bit of overlap yeah you know
they all do flow from the same thesis
everything’s next economics right which
means never buy the causes of a systemic
risk always buy the solutions to the
systemic risks so we we’ve always been
fossil free we’ve always just looked for
the things that are driving productivity
gains and innovation and renewable
energies of course we love waste to
value and then increasingly we think
about inequality as a systemic risk so
we’re trying to make investments that
address that as well
and so yeah every strategy we manage
does flow from that same philosophy and
the way that they differ is what they’re
designed to do in terms of their long
term goals of the account holder so our
growth and income portfolio we right now
we have it yielding a little over 5%
dividend yield and so that’s for people
looking for a little bit of income or
who maybe aren’t as excited by the
volatility and our other strategies the
one that we have co-branded with the
Sierra Club Sierra Club Green alpha
predictably name is our most
concentrated and therefore the most
volatile and it has been known to you
know have a 100% year which would get in
2013 I believe oh you know or have a
meaningfully negative year overall it’s
average annuals are good but the
volatility around that Center you know
is a lot sure
and then probably our most popular
separate account is our Green alpha next
economy index we call it again extra
short and that has every stock in it
that we deem to live in the next economy
and also pass our bottom up process and
therefore be deemed by us to be
investment worthy so that’s basically
the whole that’s that’s our attempt to
get our arms around the whole next
economy right if you like that’s our S&P
500 for the future and I saw a lot of
them have maybe 20% foreign to so you do
try to get global we sure do and in the
in the next economy index were more like
35 percent foreign by weight and by
source of revenues it’s over half and we
think we think that’s important you know
there’s a few reasons for that there’s
normal reasons just geographical
diversification is good for risk
management but also when you’re talking
about next economy names you know you
mentioned renewable energy well there
are some places that are still a little
bit intransigent when it comes to that
you know we have tariffs on solar in
this country so it’s really nice some of
my solar manufacturers have most of
their distribution in Southeast Asia
they you know they’re not confronted
with that and they’re still making
plenty of money so that’s kind of that’s
part of what I meant when I mentioned
earlier that renewables are tricky right
now and you’ve really got a through your
homework to pick the ones that have the
best shot at being the winners yeah some
of these I could see being a longer play
I mean eventually you know we’re getting
off the fossil fuels but it could be
along depending on administration’s and
yeah government policies it could be
whatever not a straight line yeah that’s
right you know when I mentioned that it
looks like solar is poised globally to
have you know a 25 X growth in its
deploy
over the next couple of decades you know
I don’t think any serious economist or
thinker disputes that but you’re right
it’s not gonna be a straight line it’s
gonna be uneven it’s gonna be lumpy it’s
gonna be tricky so you definitely want
to benefit from that growth but you
really have to have your eye right on it
all the time yeah to really get the
benefit from it and then the other side
is equally true
you know fossil fuels will be phased out
and at least greatly diminished over the
next couple three decades but that also
won’t be a straight line you know
sometimes people ask me hey why don’t
you have a long short strategy and get
short the causes of our big risks right
so fossil fuels and internal combustion
engines and you know globally more
volatility in there that just scares me
like I I do think that over the long-run
a fossil short would be a great idea but
am I gonna have to pay a big mark to
market tomorrow yeah maybe and I don’t
want you yeah yeah you don’t know that
that right I could see avoiding that
yeah um so does green alpha do you guys
engage with shareholder advocacy or
voting proxies that kind of work yeah
well we’re really aggressive on voting
proxies arena Abbott who is our boss of
marketing also takes care of that and
she very carefully reviews every proxy
and then in our investment committee
meetings weekly we review all the ones
that she has any questions on you know
we’ve got a long manual that is full of
everything we want to vote on and or
against so you know we always vote for
more diversity on boards we always vote
to change the auditor we always are
careful with executive count all of
those issues on the other side though in
terms of reaching out and actively
engaging well we have done a little bit
of that we’re not as aggressive there as
some ESG managers because we simply
don’t own the causes of the big problems
so we’re not going to take the approach
of buying you know say Exxon and then
pressuring them to put a climate
scientist on the board other managers
have taken that approach and that’s
absolutely valid I think we need to we
need to address our big risks on all
four
but that’s just not our approach I just
rather not hold that to start with and
and therefore there I don’t have
anything to engage with now sometimes
inside of solutions providers we will
see something that we think is worth
engaging on but it’s just not as common
that makes sense and how about you do do
fixed fixed investments I mean do you do
community investing or I mean what kind
of fixed investments do you get into you
know we’re just we’ve just gotten
started in that in the last couple of
years and neither me nor my co-founder
jeremy beans and nor the other member of
our investment committee our chief
operating officer betsy Rossiter none of
us have experience in fixed income so
for that we have engaged third party
Charles sand mill whom you might know
he’s he’s had been a green bond guy for
years and he really knows what he’s
doing so he helps to select those and
know were mostly corporates and some
governments especially when they are
project bonds where they’re pointed
specifically at a municipality say
that’s working on a well I guess that
could be community solar but not so much
a community bond more municipal and yeah
and then also green bonds from corporate
America but even there they need to be
with him what we would think of it’s the
next economy yeah I mean I guess
community investing I that’s kind of a
vague topic but but supporting or green
bonds are supporting your screening on
your fixed income for classes that that
fit your thesis or fit your mission yeah
exactly and so our role in that is to
let Charles know you know here are all
the corporate actors you know if you
like here’s the list of the annex
companies that we think belong in the
next economy and we therefore would be
pleased owning their debt and then his
role is then to go out being the bond
expert which again we’re not is to go
out and and find out instruments that
those companies issued that we can then
put our fixed income interested clients
into
and he also looks for green bond funds
that we can aggregate into if you like
sort of the portfolio of funds sure so
all that’s yeah
what about could you just touch on some
of the other areas I know energy makes a
lot of sense we know where it’s going
here’s where we are here is future what
other you know to get a diversified
portfolio what other industries or areas
are you looking at you know everywhere
there’s an innovative disruption that is
either and greatly hopefully improving
the productivity to the economy or
directly solving a risk in a way that
this again disrupts its predecessor
we’re interested in so starting with
agriculture we’re interested in things
that sport indoor farming as you know
the Green Revolution allowed us to
escape malthus’s curse and and the Club
of Rome said we were gonna run out of
ability to feed ourselves with with
world farming you know as early as the
mid 70s and of course we avoided that
with herbicides pesticides and of course
fertilizers but now that’s run its
course and you know the UN is saying
there might be 50 harvests left in the
topsoil of most of the world so we think
well what’s a solution and increasingly
it folks that are turning around the
world are turning the indoor farming
this is a huge benefit right because
it’s close to can be close to urban
centers it uses maybe 1% of the water of
outdoor farming so it’s hyper water
efficient on that level it’s naturally
organic because it’s indoors you don’t
need to resize your pesticides but it’s
energy intensive so where the investment
plays there well companies that may grow
girl lights are obviously key the
companies that actually provide the
infrastructure the repurposing of the
like shipping containers to do that and
then of course they all need to be
covered with solar panels and have
access to wind energy as well so there’s
an interesting nexus there and there’s
companies that make the more crop for
drop indoor irrigation systems that make
interesting verticals and then you know
where else around the economy I I always
like to mention that even though he’s a
biologist in my mind
yo Wilson the the hard
biologist and the founder of the half
earth movement is actually an economist
because he will talk a lot about how the
the digitization of the economy the
digitalization of the economy is making
it more productive and more efficient
well in economic terms what he’s saying
is our technology and innovation is
proceeding to the point where we’re
getting a lot more economic output out
of far fewer economic inputs Wilson’s
come in there is that we’re going to be
able to ultimately take into to its
ultimate conclusion of that process get
so much output out of so few input that
we can all derive a good standard of
living without crossing the planetary
boundaries just far far more and more
productive so we’re interested in that
right so we love things like automation
like AI like machine learning like the
Internet of Things connectivity in
general the backbone of smart cities we
think these things are while they don’t
appear to be sustainability oriented
perhaps at first glance they are
actually deeply important in terms of
getting the world onto a sustainable
footing in the long run and we think
that that’s critical and not only that
but because it’s associated with such
great productivity gains
it also means it creates wealth it makes
a fantastic long-term investment so what
is a win-win yeah well back to
agriculture like these green house or
indoor so are they good investments at
this time I mean I could see that being
the future after the 50 harvests or ever
you know it becomes a cost but I could
see it just costing more at this point
yeah yeah and so you start slow and you
have relatively minimal exposure for now
and you get your exposure in markets
that have lots of other applications
still too so you know I mentioned
agricultural lights that makes a
fantastic investment right now because
in addition to the long term
agricultural need you immediately have
lots of market for that so from indoor
girl operations here in Colorado
for obvious reasons and to to just
indoor gardeners who just love their
plants and you want to buy grow lights
like there’s actually a huge demand for
those already and philips Lighting just
to to my end on all holding is a great
example of somebody providing those who
has an established existing market is
making great revenues doing that and
stands to benefit as indoor farming
grows so it’s sort of a now and then
play I get you yeah I mean you
definitely have to be looking at what’s
a good buy today or what’s a good value
for the investment but knowing that in
the future that’s where we could be
moving yeah yeah what’s working already
now and yet poised to benefit from the
mega trend sure how has not being in
fossil fuels are there any other sectors
where you’re not in that I mean have you
had any performance issues I can’t
really say that we have I will say that
we perform differently than the big
benchmark so you’ll have a hard time
finding a strong correlation between any
of our strategies and and in kind of a
major benchmark or or index we have
general equities correlation of course
so of the major indices the one we
probably correlated the most with is the
MSCI equity l world just because that’s
every investable stock they say and so
you have general equities correlation
there and that’s probably as close as we
come overall at our average annuals
particularly on mechanics which is going
to have 10 years of track record on
December 30th its average annual is
competitive with most of the big global
indices it outperforms some years
underperforms other years or months or
days for that matter but no in aggregate
we can’t perceive that we’ve had
performance issues and in general we’re
very pleased with the long term
performance yeah I mean that’s what the
conference seemed to point to that that
there was no falter or bad part of
avoiding some sector you’re not we don’t
perceive any and you know we have we’re
not talking about a backtest or a
hypothetical leader we’re talking about
10 years of live money track record
that’s very easy to audit and and see
for yourself
that’s great do you have plans in the
future for any I mean I think the mutual
fund is the most attractive for my
clients just because it’s the
accessibility of it yeah but I do think
that folio strategy may become more and
more popular well it’s I can tell you
from from our point of view it is we
were getting more and more interest in
that mostly from advisers but also just
from individuals as well if they if they
reach our separate account minimum which
we actually keep pretty low it relative
to the world of separate accounts when I
saw it I mean the Sierra Club minimum is
about 10,000 it’s only 10,000 and Sierra
Club in order to to reach the agreement
for the co-branding really wanted it to
be that low because they want their
separate account strategy to be
accessible to most of their members it’s
not just for Sierra Club members but
that’s who they intend it for right so
that’s why that’s so low and then
outside of that our minimums are in a
couple of our strategies a hundred
thousand and in a couple of the tougher
to run ones they’re 250 but as you know
very well in separate account land
that’s super low that’s relatively low
yeah and we do want to keep them low we
want to democratize access to what we
think of as actual sustainability
focused investing you know I don’t know
if you hear Jeremy Grantham’s speech at
the HRA conference he’s obviously
fantastic and he’s got his eye right on
the right risks in my opinion and he’s
thinking about it right and there
climate change portfolio is very
interesting it isn’t that different from
what we’ve been doing for 10 years
although he’s got a little more exposure
to like commodities like copper because
he perceives probably correctly that
we’re gonna need a ton of that
conducting metal to have things like
more electric vehicles ok I don’t
disagree with that the big difference is
you need to be extremely high net-worth
to access his strategies you need to
come with five or ten million you know
so relative to that I think a hundred
thousand looks like a pretty accessible
deal right I agree
that’s super okay I appreciate your time
this is great information I really like
the approach you’re taking that that I
haven’t heard of many firms talking this
way about really making that the
fundamental mission of their investments
yeah you know I think that most managers
you know you got it you got it you did a
CFA you got an MBA and you think that
you there’s a requirement to subscribe
to Modern Portfolio theory but the truth
is there isn’t there is because we think
there is but I think it’s entirely
possible to think a little bit more like
a venture capitalist and just go right
after what’s going to work and not worry
about whether or not you correlate right
and and you know things like ESG score
is kind of as valuable as they are tend
to muddy that picture in my opinion
because if you fall into the trap that
if a company has good ESG scores it
belongs in a sustainability portfolio
you in our opinion you’ve missed the
boat because what matters most is what a
company does where it’s getting paid how
it turns its revenue and if it’s not
earning its revenue from providing a
solution then it doesn’t belong in the
next economy or put another way if a
company isn’t doing something to lower
the risk profile of the economy and the
environment that supports the economy
then the tail winds aren’t going to be
there for that company indefinitely well
the the ESG score is they think it can
be very misleading because their best of
class kind of setups I mean I think it’s
you so I’m glad they’re starting to have
some kind of criteria or way to measure
but I yeah people need to look carefully
before trusting that yeah you know a
fossil fuels company could have a
fantastic yesternight score you know I
know a lot of internal combustion engine
makers yeah
you know we won’t by internal combustion
because that’s a major not only a matter
of of greenhouse gases and all kinds of
noxious pollution that is really bad for
us but it’s also been major demand
driver for fossil fuels like you can’t
own Toyota they make 10 million cars a
year and the average fleet mpg is 26
they you know they’re probably Exxon’s
favorite firm because they drive them at
half their demand like that’s a cause of
a risk so I don’t really care how good a
TSG score is right right so yeah our
approach is definitely a little
different but
but hopefully that differentiates us
yeah definitely no I like the direction
you’re going and that’s that’s great
that you’re out there and it’s it’s nice
that it’s accessible that’s that’s
really helpful cool and you know the
other thing we’re hoping to do to go
kind of way back and answer your
question is in the relatively near
future by which I hope I mean 2019 is
get an ETF out as well okay that’ll help
the accessibility even more definitely
know that that’s great that’s a goal
all right Garvin thank you very much for
your time I really appreciate it
bill I really had a great time thanks
for having me I hope that was helpful
this is a pretty unique investment
approach just as a disclosure this
podcast is for informational use only
we’re not making investment
recommendations this is not an
appropriate investment or these are not
appropriate for everyone as with any
investment please read the prospectus
discuss it with your financial planner
all right thank you for listening to the
impact financial planners podcast we
have several other podcasts coming up a
few more interviews scheduled we have
several coming up every couple weeks
they’ll be posting this has been brought
to you by aao financial if you need help
with any part of your finances please
contact a IO financial for a free
meeting a IO financial com as always I
appreciate your feedback I love comments
in the under the YouTube videos on the
podcast comments are great you can also
email me or send me a Twitter connection
or Facebook whatever works for you my
email address is bill at a io financial
com
I will respond to any comments I get all
right and if you like these podcasts and
videos please leave a brief review and
rating on iTunes or stitcher or Google
Play or at YouTube please subscribe to
the channel
post a comment it’ll make it easier for
other people to find this to move this
work forward all right thanks a lot take
you