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.

Sincerely,

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.”

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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.

Sincerely,

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.

Sincerely,

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.

Sincerely,

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.”

‘Seeding the markets’

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There has been a move toward micro-finance over the last few years in a number of areas within the impact investment arena. As more consumers adhere to the organic and sustainably farmed initiative themes, there will be a higher demand for this type of enterprise globally.

Although this market is not new, it is being continually “seeded” by Root Capital, an entrepreneurial non-profit founded by Willy Foote back in 1999 with a loan to a cardamom and coffee cooperative in northwestern Guatemala. We tend to believe that these types of loans can often be overlooked by the major lenders and at most would constitute a small portion of their loan book.

According to a March 14, 2015 article in the Economist, “Root’s business is lending to the owners of small farms in poor countries. An estimated 450m of these smallholdings exist worldwide, typically providing a subsistence-at-best income for more than 2 billion of the poorest people on the planet. Mainstream finance has largely ignored them. They face multiple hardships, including land of poor quality, a lack of infrastructure to get their output to market and the constant threat of being wiped out by extreme weather. The lack of access to credit for working capital and investment makes a bad situation worse.”

With any loan from the highest quality to AAA companies to high yield bonds, there are a variety of risks. Think about the recent high yield volatility largely due to one sector in energy. While we cannot vouch for Roots loan portfolio, we feel this specific asset class is a risk worthy of exploration.

“The company says that less than 3% of its loans go bad, a failure rate that would be impressive even among much richer clients. The loans, which come with free advice and training in how best to use the money, are helping farmers increase their productivity and so boost their incomes. The money also protects farmers from having to sell their wares cheaply to the first available buyer. More than half of Root’s borrowers see their income increase by at least 20% a year after receiving a loan; it rises by over 50% for nearly a third of them.”

It is an interesting time in the markets as a robust group of non-profits and for-profit organizations work toward a larger opportunity set for investors. These investments require a lot of due-diligence in order for it to make it as a complement to an existing portfolio.

Keep this in mind as you explore the many possibilities outside the traditional asset allocation.

Sincerely,

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.”

Fossil Fuel Divestment

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The world runs on them and we as a society still depend on them in direct and indirect ways. Unless someone goes completely off the grid, they are a fact of economic and social life. However, many people feel conflicted as they believe that the use of fossil fuel is too some extent harming the environment and potentially our health.

An individual or organization can reduce their dependence on these fuels directly and indirectly. Directly they are able to gauge and measure their own usage and construct a plan to reduce through various alternative ways of conducting business.

The indirect route is interesting as investors can reduce fossil fuels from their investment portfolio. It would be very difficult to eliminate them altogether as most areas of the modern economy are touched by the use of fossil fuels.

The most apparent way to begin the process is to reduce oil and gas companies from ones portfolio. If someone is invested in mutual funds or ETFs, they can begin by selling those with the highest concentration of these type of companies and replacing the allocation with a “green” alternative.

Green Century is a small fund company with a balanced and an equity fund. If your intent is to ween off of the fossil fuel theme inherent in most diversified portfolios, philosophically it may make sense to examine this company. Below is their stated goal within the funds and something to seriously contemplate as more firms and foundations divest fossil fuels.

“The Fund seeks to invest in well managed companies that are leaders and innovators, strive to maximize their environmental advantages and minimize their environmental risks. To select the stocks for investment, the portfolio managers at the sub-advisor Trillium Asset Management use rigorous financial analysis that employs a “growth at a reasonable price” discipline. The portfolio managers use similar financial and environmental criteria in selecting bonds in an effort to modulate the Fund’s overall level of investment risk and exposure to business, economic, and interest rate trends. The portfolio managers also seek to invest in green bonds that support energy efficiency and emissions reductions programs through domestic and international corporations and agencies. ”

“Green Century believes that companies that are environmentally responsible could enjoy competitive advantages including cost and liability reductions, quality improvements, profitability enhancements, and access to new and expanding growth markets. Such companies may also gain from strong relationships with their stakeholders.”

The second paragraph is very powerful if all their assertions come to fruition. As the trend continues toward growth markets in green products and as stakeholders are taken into higher consideration, Zenith believes this is an area very worth exploring as the capital markets evolve over the next twenty years and beyond.

Sincerely,

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.”