In the wake of the Volkswagen emissions scandal, it’s not only consumers of their green diesel cars that have cause to be upset. A lot of investors are feeling misled and taken advantage of by the company, too (as well they might; as of this writing shares are down ~37% 2015 to date). We and our clients managed to avoid being caught with these shares, not for any quantitative or value reasons, but because of the portfolio selection process that emerges from our macro-economic thesis, Next Economics.
Now, we’ve got our fair share of holdings that are negative for the year thus far, so in no sense am I gloating, but it honestly never occurred to us to allocate any investments to VW in any of our portfolios. Not because we saw through or even suspected their emissions shenanigans, but because the very concept of gas/diesel-burning personal transportation is anathema to any meaningful model of an indefinitely sustainable economy.
Auto sector (or any sector) exposure in our portfolios is limited to firms providing true systemic solutions to the great risks now confronting the global economy and its underlying ecology and biodiversity. This means we’ll invest only in transportation that can be powered by truly renewable energies and that therefore can, in actual terms, advance the necessity of decarbonizing our advanced, technological civilization. Similarly, we've never invested in some erstwhile green favorites such as Toyota. Sure, Toyota popularized the hybrid, but its bread and butter is still gas- and diesel-burning pickup trucks and cars, and indeed its average 2016 fleet mpg by CAFE estimate is 38.4 for cars, 29.1 for trucks. In aggregate, then, the business activities of Toyota or VW, scandal or no scandal, are doing more to cause our great risks than they are to mitigate or provide solutions to those risks. In other words, by creating and enabling lots of demand, they are directly feeding the beast of the fossil fuels economy. This now is visibly not the way forward for the global economy and investing in these risks should be contrary to the mission of any long-term fiduciary.
Compared with the fundamental long-term flaws of fossil-fuels powered personal transportation, the minor technological glitches affecting Tesla's share price these last couple weeks seem trivial and very fixable.
Next Economics models what a human economy that can work for everyone, indefinitely, might look like. And Next Economy portfolio theory exists to contrast with the business-as-usual investment strategies mandated by modern portfolio theory. Green Alpha therefore cares far less about slavishly following sector allocation rules. Instead, we use risk-factor allocations across sectors and industries, choosing companies of all sizes from the USA and around the world. In other words, if a company is, in aggregate, not providing a solution, then it's not in a Green Alpha portfolio.
Next Economy Portfolio Theory may sound radical to some, but I argue that now, in 2015, it has become traditional portfolio construction that is driving us toward terrible economic and environmental outcomes. If investment in the causes of major systemic risks is what we still consider safe and prudent, then, fine, call me a radical. But in the end, a portfolio is nothing more than a vision for the future -- a set of predictions. So if you think the near future will be characterized by advanced, efficient and renewable technologies providing economic growth, making sustainability possible and life more fascinating, then you might be a Next Economist, too. Which means you see why we added Tesla and avoided VW and Toyota by thesis, not by chance.
Garvin Jabusch is cofounder and chief investment officer of Green Alpha®Advisors, LLC. He is co-manager of the Shelton Green Alpha Fund (NEXTX), of the Green Alpha Next Economy Index, and of the Sierra Club Green Alpha Portfolio. He also authors the Sierra Club's economics blog, "Green Alpha's Next Economy."
Disclosure: Green Alpha Advisors is long Tesla and has no positions in Volkswagen or Toyota.