Water-Will it flow to your portfolio?

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Access to water does not pose a challenge for many people in their daily lives as we drink a lot of it especially up here in the relatively dry mountains of Colorado. We bathe, wash our dishes and clothes and prepare meals with water. A lot of it.  Water may be the ultimate commodity as we simply cannot survive without it.

It is so important that there are battles across states with regard to “ownership” and rights to rivers sometimes hundreds of miles away. The costs are high to be able to maintain a clean water supply for our communities as infrastructure needs are estimated in the billions. In countries across the globe potable water is a dream as the reality is much more dire.

I am currently reading, “The Big Thirst-The Secret Life and Turbulent Future of Water” by Charles Fishman who provides amazing statistics and even more amazing stories how we take for granted the water that sustains us. With local abundance or shortages across the country and globe, the attitude toward water can be highly attributed to current circumstances.

We wonder if the attitude of plenty is partially due to the price of water itself. A lot of people will pay many times the price of the tap water for a bottle of water but if asked to pay more for water on a monthly basis many would protest. Would a human sustenance price combined with a market mechanism for “excess” water help alleviate the strain on the water system?

Given the seriousness of the water issues facing the nation and the globe, it does come at somewhat of a surprise that there are only a handful of mutual funds and exchange traded funds that invest in companies focused to some degree on water.

One such fund is the Calvert Global Water Fund (CFWAX) with about $549 million in assets. According to its prospectus, “The Fund normally invests at least 80% of its net assets in equity securities of U.S. and non-U.S. companies whose main business is in the water sector or that are significantly involved in water-related services or technologies.”

In some ways, this fund covers a lot of ground as they hold investments in water treatment, engineering, filtration, environmental controls, water-related equipment, water and waste water services, and water utilities.

Given the fund’s mandate, it does make sense that a lot of the companies fall into the industrial and water utility category with industrial concerns holding close to 67% across various sub-sectors. This could cause under-performance during a time when this sector does poorly in general.

The fund has not kept up with the S&P 500 over the last year but has beaten the Natural resources index which actually has not been too difficult given the horrible environment for commodities and commodity producers. The 1.86% fee is also something to take into consideration as that is fairly high for access to publicly traded securities even if they are within a reasonably tight mandate.

A passive investment in an ETF such as Powershares Water Resources (PHO) has beaten the Calvert Fund by a decent margin with less fee and turnover. PHO also has a heavy weight to industrial companies but does provide the investor exposure to the water theme so prior to an investment among other items in the due diligence process, check your other funds for over weight by industry or company.

We listed two funds for review but are the choices limited to the publicly traded space or can a more holistic approach help achieve your risk reduction goals and increase your firms opportunity set?

We do believe that the answer is yes but that it pays to step back and appreciate the integral part water plays in all of our existence from farming to manufacturing and eventually to our health. Given the inter-connectivity, it makes sense to us, to potentially incorporate  areas of the investment world that are not always the most traditional, but could be the most valuable.

Water makes its way through the river system and ultimately touches farmland and forests as well. Knowing waters importance, it would be reasonable to invest in river and watershed preservation as well as farming that promotes healthy soil to make best use of this critical resource.

The mechanisms can take the form of private and public partnerships and some are funds that invest in micro loans or private equity to help alleviate the insatiable thirst for water.

As we move forward in the capital markets in the way we view traditional asset allocation, there will be exciting opportunities to expand your portfolio and to enhance profitability potential in the US and globally for decades.


Tom Koehler-CIO

“Socially Responsible and Impact Investments represent a complex asset class and while we covered a small amount, there is a lot more information needed prior to making an investment decision. Let us know if we can provide more information to help in that process.”


Socially responsible? The challenges that lie ahead

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SRI or socially responsible investments have been growing in popularity over the past few years and that has been reflected in our writings over the last few months as it seems to become more important by the week.  We have touched upon many topics that are wide ranging but that share an underlying theme.

Change is the theme that resonates throughout the writings. ‘Yield cos’ are corporate structures that address the apparent need for financial vehicles that address the changing alternative energy landscape. Micro-finance structures cover many asset classes and their growth within the profit and non-profit world continue growth to address the changing needs inherent within the third world farming and green products communities.

Mutual funds that seek to invest without exposure to fossil fuel companies are responding to sweeping changes as well are ETFs that seek and index composition with less carbon impact. The products, firms and innovation is growing along side these changes.

There are challenges that accompany this change. SRI investments are still considered by many investors to lack performance legitimacy and to be to opaque to be able to truly define “socially responsible”. We agree that to some extent there is a lot of interpretation with regard to what constitutes socially responsible.

It would be reasonably easier if one simply did not want something in their portfolio such as tobacco or big agriculture but what if an investor wanted a fully diversified portfolio that addressed their ethos and was calibrated to quality Environmental, Social and Governance factors? This is a massive challenge for the majority of wealth managers who have millennials as the next wave of inherited wealth.  How will they be able to service and cultivate those relationships that ask for more than a traditional balanced portfolio?

It becomes even more complicated as the wealth grows and the interests become much more specific such as a desire to allocate 50% toward true impact investments. Will most firms have the capacity to deliver thoughtful solutions within the early stage green tech or organic farming space?

The preparation for the massive wealth transfer to the next few generations and the investment needs will be challenging but most likely rewarding to those who anticipate beyond the next quarter. We look forward to aiding in your preparation.


Tom Koehler-CIO

“Socially Responsible Investments represent a complex asset class and while we covered a small amount, there is a lot more information needed prior to making an investment decision. Let us know if we can provide more information to help in that process.”

The ESG/Impact world is massive

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So far in 2015, we have written on the ESG and Impact investment world beginning with the quandary that it presents given its sheer magnitude. It used to be the bottom line but now there is a focus with some firms, a triple bottom line which goes beyond the traditional metrics used in financial analysis.

The landscape is changing drastically as companies are now forming “b” corporations that have a broader mandate that includes an analysis of the impact they have on the environment for one. We have written on this in a prior piece and believe that the number of these companies will grow in number and importance.

In addition, investor options are expanding in the open and closed end space such as with funds who own little or no fossil fuel companies. Firms and individuals can partly or totally divest from those areas they do not believe helps the long run health of the nation. Or the world for that matter as micro lending to sustainable farmers in third world countries is growing as well.

It is a changing world and the investment opportunities should reflect. We are glad that it is and welcome your thoughts on the ESG/Impact investment theme.


Tom Koehler-CIO

Renewable Energy Investments-“Yield Cos”

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“Yield Co is a publicly traded company that is formed to own operating assets that produce a predictable cash flow. Separating volatile activities (e.g. R&D construction) from stable and less volatile cash flows of operating assets can lower the cost of capital. Yield cos are expected to pay a major portion of their earnings in dividends, which may be a valuable source of funding for parent companies which own a sizeable stake.

Yield cos are commonly used in the energy industry, particularly in renewable energy to protect investors against regulatory changes. They serve the same purpose as master limited partnerships (MLPs) and real estate investment trusts (REITs), which most utilities can’t form due to regulatory constraints. Yield cos give investors a chance to participate in renewable energy without many of the risks associated with it.”

We have mentioned green bonds in prior articles and we will revisit the risk associated with those in further pieces but for now we would simply like to highlight a basic risk with regard to the equity avenue way to gain exposure to alternative energy.

Since yield cos return most of their investable cash to shareholders, most expected future dividend growth cannot come from re-investing earnings, as we would expect from traditional growth companies.  Hence, dividend growth will have to come either from issuing debt and using that to buy assets, or from buying assets (with debt or new equity) at low prices which make those assets significantly accretive to cash flow per share.

If debt is used to buy new assets, this will generally increase the dividend, but it will also increase overall risk to shareholders.  There is also a natural limit to debt, because there will come a point where lenders will become unwilling to provide additional funds.

The ability to provide healthy yields depends on additional asset purchases at a value and this is becoming more difficult in a tough space. We will in future articles identify those that provide some of the best risk to reward situations for investors.


Tom Koehler-CIO

“Socially Responsible Investments represent a complex asset class and while we covered a small amount, there is a lot more information needed prior to making an investment decision. Let us know if we can provide more information to help in that process.”

The Organic Trend

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Organic food consumption and farming has been growing in popularity given the disdain for the many of the practices within the larger conventional agricultural community and due to a desire to consume products farmed mainly without synthetic pesticides. In addition, consumers and advocacy groups are pushing for transparency with regard to GMO or genetically modified organisms as this part of the crop yielding equation has many worried about our health.

According to wikipedia, “Organic foods are foods produced by organic farming. While the standards differ worldwide, organic farming in general features cultural, biological, and mechanical practices that foster cycling of resources, promote ecological balance, and conserve biodiversity. Synthetic pesticides and chemical fertilizers are not allowed, although certain organically approved pesticides may be used under limited conditions. In general, organic foods are also not processed using irradiation industrial solvents, or synthetic food additives.”

Studies continue from both the organic and the conventional farming communities to aid in our assessment of the health benefits and risks with both methods but there is no argument with regard to the interest and growth of this trend. The amount of sales continues to increase at the traditional super market and specialty health stores. This has established a strong demand for organic farms with top quality soil and farming practices.

It seems to us that there are a number of ways to invest in the organic movement and a couple major reasons why. If the evidence continues to grow that points to major environmental and health flaws in conventional agriculture, the larger farming and food concerns may have their “multiple” eroded as the market perceives them to be more of a societal and investment risk.

The reason that we mention the societal aspect is that we believe that companies and industries that create a positive impact in a social responsible fashion have a solid chance of financial success and the ability to command a premium in the market. Grocers and food companies that possess this attribute may be a more appealing choice among alternative traditional investments.

There are a lot of publicly traded companies to analyze including organic food corporations and specialty grocers and even non-publicly traded interests in the organic farm itself. There is a lot to digest within this area but given the growth and the potential portfolio risk reduction potential, it is worth a morsel of consideration.


Tom Koehler-CIO

“Socially Responsible Investments represent a complex asset class and while we covered a small amount, there is a lot more information needed prior to making an investment decision. Let us know if we can provide more information to help in that process.”

Sustainability investments-more scrutiny

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Sustainable investment themes are varied and the very word means a lot of different things to different people. Morgan Stanley, a large and reputable investment bank has recently come out with a study as they and a lot of the investment community attempts to quantify SRI investments and the role in a portfolio.

They define sustainability as follows; “We define sustainability as a commitment to economic well-being for both the present and the future, balancing society’s needs today with the demands of tomorrow. Sustainability encompasses behaviors, processes, tools and technologies that can be perpetuated and replicated in ways that achieve economic, social or environmental benefits. We see sustainable investing as the practice of mobilizing capital to businesses that engage in these behaviors and practices.”

The trend in this direction is real as according to the same report, $1 out of $6 is going toward sustainability. Audrey Choi, chief executive officer of Morgan Stanley’s Institute for Sustainable Investing, led an initiative to look at some historical data and the found some evidence that warrants a robust continued conversation on the topic.

“They analyzed performance data for 10,228 open-end mutual funds and 2,874 managed portfolios known as Separately Managed Accounts (SMAs). They compared investment strategies that use environmental, social, and governance data—sustainability metrics—to those that don’t.

Sustainable investments in almost every asset class performed as well, or better, than traditional investment strategies. Sustainable equity mutual funds had equal or higher median returns and equal or lower volatility for 64 percent of the periods examined over seven years.

In contrast, the managed portfolios underperformed traditional counterparts for 64 percent of the periods. But the sustainable investments had significantly less volatility, and on a risk-adjusted basis, they performed similarly.”

In our opinion it is worthwhile and even essential for firms to develop a thesis around this topic to be able to market successfully and as robustly as possible to take care of their current client base and to potentially cater to the millennial demographic. This is supported by one survey done by Morgan Stanley, as they found, In a poll of 800 investors, 71 percent said they are interested in sustainable investing. Millennials and women were each twice as likely as others to pursue sustainable investments.

While there are skeptics and there continues to be much work to do, a 2012 Harvard Business School Study that tracked the performance of 180 companies over 18 years found that the 90 companies that adopted environmentally and socially responsible policies significantly outperformed their peers. Every dollar invested in a portfolio of sustainable companies in 1993 would have grown to $22.60 by 2011. That beats the rise to $15.40 for a portfolio of companies less focused on sustainability .

The evidence continues to build that supports the case for a thorough look at the various aspects of the SRI/ESG and the impact investment landscape. It could help bolster firm recognition as clients recognize the more robust service offering and this could lead to additional referrals.

It could also help serve the specific needs of clients with a strong sense of support for one or more areas of the sustainability arena.


Tom Koehler-CIO

“Socially Responsible Investments represent a complex asset class and while we covered a small amount, there is a lot more information needed prior to making an investment decision. Let us know if we can provide more information to help in that process.”

Impact Private Equity

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We have written on the micro-finance area of the capital markets and how this mechanism can achieve two major goals. The first is to achieve solid financial returns on an absolute and risk adjusted basis while adding diversification to a portfolio, and the other is to enact definitive societal change at the micro level.

In the case of Root Capital the goal is to seed finance the poor farming concerns in developing countries. The rate of return is reasonably high while the default rate is reasonably low which is appealing for investors and at the same the initiative provides for a higher standard of living for the indigenous population.

That is only one example within one silo of the exciting world of impact investments and represents the very micro financing level. What occurs if we move up the capital level?

While there are many level within finance, private equity could arguably be another arrow within an investors quiver. One firm, DBL Investors out of San Francisco, CA connects innovative companies with investors through a two fold approach.

“DBL Investors assists its port­fo­lio com­pa­nies in achiev­ing a “dou­ble bot­tom line”: that is, strong long-​​term finan­cial suc­cess as well as pos­i­tive social, envi­ron­men­tal and eco­nomic impact in the local com­mu­nity. We have found that dou­ble bot­tom line prac­tices that com­pa­nies choose to adopt can be sig­nif­i­cantly ben­e­fi­cial to the fis­cal bot­tom line both via direct ben­e­fits of cost sav­ings and value cre­ation, and via indi­rect ben­e­fits of cre­at­ing good­will with their mar­ket, cus­tomers and com­mu­nity, and enhanc­ing employee morale and retention.”

The diversification is impressive as they make investments mainly across Clean Tech, Health Care, Information Technology, and Sustainability-Oriented Products and Services. We believe these will become powerful drivers in the decades ahead as the consumer and investors driven by financial AND ideologically based platforms.

The opportunity set for investors continues to expand beyond the traditional asset allocation models and this can serve two major purposes. The first is to attain the financial results within a portfolio that will allow for growth and diversification through a more robust opportunity set not available within the basic framework.

Secondly, it allows investors to finance forward looking, dynamic companies that have the potential for healthful societal change AND to profit.

We continue to be excited about the exciting changes to the capital markets and the potential for investors.


Tom Koehler-CIO

“Socially Responsible Investments represent a complex asset class and while we covered a small amount, there is a lot more information needed prior to making an investment decision. Let us know if we can provide more information to help in that process.”

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