SB Webinar | How Sustainable Portfolios Can Outperform Traditional Investing
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How sustainable is your portfolio? How about your 401(k) choices? Is your investing aligned with building a better world? For most investors, the answer is not really. Overall, 80% of the S&P 500 ...

How sustainable is your portfolio? How about your 401(k) choices? Is your investing aligned with building a better world? For most investors, the answer is not really. Overall, 80% of the S&P 500 stock market valuation is driven by factors that are not accurately captured and valued on financial statements – like people (human capital), natural resources (ecological capital) and trust (social capital).

This webinar will show how leading investment analysts and fund managers invest in sustainably-focused companies, which can lower risk and enhance potential financial returns for investment portfolios -- and create net benefit for society.

This is a preview of Paul Herman's session at New Metrics '14, three days of in-depth discussion with visionary leaders who are examining leading-edge work that expands the way business creates, quantifies and manages the value it delivers through the metrics it adopts, coming up this September.

What You Will Learn:
-Discover how Nobel-Prize winning financial theory may be outdated
-Learn how leading investment managers and analysts build sustainable portfolios
-Explore how your company can attract investors seeking impact
-See how your portfolio, and your 401k, can become more sustainable

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SB Webinar | How Sustainable Portfolios Can Outperform Traditional Investing Presentation Transcript

  • 1. Evolving Beyond Modern Portfolio Theory How Higher Impact Portfolios Can Outperform Traditional Investing June 25, 2014
  • 2. HIP = Human Impact + Profit HIP Solve Human Needs (Do Good) Seek Higher Profits (Make Money) CONFIDENTIAL © 2006-2014 HIP Investor Inc. 2
  • 3. HIP = Human Impact + Profit HIP Solve Human Needs (Do Good) Seek Higher Profits (Make Money) CONFIDENTIAL © 2006-2014 HIP Investor Inc. 3 HIP = Higher Impact Portfolios
  • 4. HIP Investor Serves Investors, 401-k’s and Advisors CONFIDENTIAL © 2006-2014 HIP Investor Inc. 4 1. RATINGS on 7000+ investments + funds: Research, analyze & score 4500 Corporate equities (80% of global value), Corporate bonds ($24 Trillion), 2500+ muni bonds (half of $3.7 Trillion), treasuries & agency bonds on Future Risk & Upside Potential 2. SUBADVISE: Advisors, 401-k plans, & fund managers seeking to be more HIP 3. ADVISE: License HIP investment indexes and manage investable portfolios (including FOSSIL-FREE)
  • 5. Your HIP Guides for Today’s Discussion © 2006-2014 HIP Investor Inc. 5 Shilpa Andalkar SVP, Client Solutions Architects & advises portfolios Keith Green SVP, Clients & Partnerships Alum of Citi, Merrill Lynch R. Paul Herman Chief Investment Officer and CEO Int’l expert in impact investing
  • 6. Special Guest: Fund Manager © 2006-2014 HIP Investor Inc. 6 Garvin Jabusch Fund Manager: NEXTX Shelton “Green Alpha” Fund Alum of Morgan Stanley; Thunderbird MBA
  • 7. Disclosure and Disclaimers © 2006-2014 HIP Investor Inc. 7 HIP Investor Ratings LLC is a California limited liability company, providing 7000 ratings for investors, advisers, fund managers and retirement plans. Shilpa Andalkar and R. Paul Herman are registered representatives of HIP Investor Inc., an investment adviser registered in the States of California, Washington, and Illinois, with clients across the USA. This is not an offer of securities. All investing has risks. Past results are not indicative of future performance.
  • 8. Today’s Agenda: How Higher Impact Portfolios Can Outperform © 2006-2014 HIP Investor Inc. 8 1. Finance Foundations: Strong or Shaky? 2. The New Fundamentals of Investing 3. Evolving Into a Higher-Impact Portfolio
  • 9. Today’s Agenda: How Higher Impact Portfolios Can Outperform © 2006-2014 HIP Investor Inc. 9 1. Finance Foundations: Strong or Shaky? 2. The New Fundamentals of Investing 3. Evolving Into a Higher-Impact Portfolio
  • 10. CONFIDENTIAL © 2006-2014 HIP Investor Inc. 10
  • 11. The Best of 1952 CONFIDENTIAL © 2006-2014 HIP Investor Inc. 11
  • 12. “State of the Art” THEN CONFIDENTIAL © 2006-2014 HIP Investor Inc. 12
  • 13. “State of the Art” NOW CONFIDENTIAL © 2006-2014 HIP Investor Inc. 13
  • 14. Dr. Harry Markowitz • 1952: Created “Modern Portfolio Theory” (MPT) • 1990: Awarded Nobel Prize for MPT • 2014: MPT is 62 years old: time to retire MPT? CONFIDENTIAL © 2006-2014 HIP Investor Inc. 14
  • 15. CONFIDENTIAL © 2006-2014 HIP Investor Inc. 15 Every Portfolio Has a Risk & Return Profile Source: Smart401k.com
  • 16. Optimizing a Portfolio: Stocks + Bonds Together Can Lower Risk CONFIDENTIAL © 2006-2014 HIP Investor Inc. 16Source: SigmaInvesting.com
  • 17. Nobel-Prize Winning Financial Theories Embed Assumptions • “The markets are efficient” • “All information is built into the prices immediately” • “You cannot outperform the market” CONFIDENTIAL © 2006-2014 HIP Investor Inc. 17
  • 18. BUT… • “The markets are frequently IN-efficient” • “All information is NOT built into the prices immediately” • “Portfolios can outperform the market” CONFIDENTIAL © 2006-2014 HIP Investor Inc. 18
  • 19. CONFIDENTIAL © 2006-2014 HIP Investor Inc. 19 “Does the Stock Market Fully Value Intangibles? * * * Employee Satisfaction and Equity Prices” Dr. Alex Edmans Wharton School
  • 20. Investing in “100 Best” to Work For Can Beat the Market (1998-2010) Source: Russell Investment Group, via © Great Places To Work® Institute 1998-2010, ANNUALIZED RETURNS +11.1% +6.7% + 3.9% + 4.3% © 2006-2013 HIP Investor Inc. 20
  • 21. Globally, Firms with More Diverse Boards Have Yielded Higher Return on Equity (ROE) CONFIDENTIAL © 2006-2014 HIP Investor Inc. 21 Source: Credit Suisse
  • 22. 25% to 50% of Mutual Funds (Active Stock Picking) Can Beat a Benchmark (Index) CONFIDENTIAL © 2006-2014 HIP Investor Inc. 22Source: Lipper; Felix Salmon More than 25% (1 in 4) generally Less than 50% (2 in 4) generally
  • 23. What’s My Exposure? Forward-Looking Investors + Advisors CONFIDENTIAL © 2006-2014 HIP Investor Inc. 23 Lara Coviello MA CFA Managing Partner at Auctus Wealth Management Author of feature on investing Jennifer Anderson, MPH, SCSP Principal at Resonate, Strategic Sustainability Management
  • 24. Sustainable Cleaner-Energy Funds Have Outperformed Many Fossil-Fuel Intensive Funds, Over 5 Years CONFIDENTIAL © 2006-2014 HIP Investor Inc. 24
  • 25. Sustainable Cleaner-Energy Funds Have Outperformed Many Fossil-Fuel Intensive Funds, Over 5 Years CONFIDENTIAL © 2006-2014 HIP Investor Inc. 25 Less Risk MoreReturn
  • 26. Long-Term, Intelligent Investors Invest Across All Asset Classes A Higher Impact Portfolio Cash Banks and credit unions that focus on sustainability e.g. 22 banks in the GABV Fixed income Bonds from impact- focused corporates and Muni’s (schools, hospitals) e.g. SNW Asset Mgmt Income Generating Appreciation Real Estate Investment Trusts (REITs) who implement resource efficiency Equities Individual firms , mutual funds and ETFs based in OECD – rated on sustainability International and Emerging Firms, funds ETFs – in emerging growth areas: Europe, Asia, Africa, Americas – rated by impact Venture Capital and Private Equity Ventures, angel funds, VC, private equity – seeking impact results Alternatives Commodity funds that may include impact criteria CONFIDENTIAL © 2006-2014 HIP Investor Inc. 26
  • 27. In 2013, a HIP-Focused PORTFOLIO Was More Optimal: Lowering RISK, Beating the RETURNS of MPT Less Risk MoreReturn * For annualized time period over the past 1 year ending December 31, 2013 (or for data since inception of strategy) RETURNS: Annualized Returns* RISK: Standard Deviation of Returns* PORTFOLIO: color of bubbles: Green = HIP Red = Vanguard Blue = Going Fossil Free Gray = MPT CONFIDENTIAL © 2006-2014 HIP Investor Inc. 27
  • 28. 1-Year Portfolio Performance (2013) HIP 24, HIP 10, MPT 18% 7% 2.5% 10% 14% 8% 1.8% 6% 11% 10% 1.1% 0% 0% 4% 8% 12% 16% 20% Return Risk Sharpe Alpha HIP24 HIP10 MPT CONFIDENTIAL © 2006-2014 HIP Investor Inc. 28
  • 29. 1-Year Portfolio Performance (2013) HIP 24, HIP 10, MPT 18% 7% 2.5% 10% 14% 8% 1.8% 6% 11% 10% 1.1% 0% 0% 4% 8% 12% 16% 20% Return Risk Sharpe Alpha HIP24 HIP10 MPT CONFIDENTIAL © 2006-2014 HIP Investor Inc. 29 Less Risk More Return
  • 30. Over 3 Years (2011-13), a HIP-Focused PORTFOLIO Was Also More Optimal: Lowering RISK Yet Exceeding MPT RETURNS CONFIDENTIAL © 2006-2014 HIP Investor Inc. 30 Less Risk MoreReturn * For annualized time period over the past 3 years ending December 31, 2013 (or for data since inception of strategy) RETURNS: Annualized Returns* RISK: Standard Deviation of Returns* PORTFOLIO: color of bubbles: Green = HIP Red = Vanguard Blue = Going Fossil Free Gray = MPT
  • 31. 3-Year Portfolio Performance (2011-2013) HIP 24, HIP 10, MPT 11% 11% 0.9% 3% 10% 12% 0.9% 2% 9% 13% 0.7% 0% 0% 4% 8% 12% 16% Return Risk Sharpe Alpha HIP24 HIP10 MPT CONFIDENTIAL © 2006-2014 HIP Investor Inc. 31
  • 32. 3-Year Portfolio Performance (2011-2013) HIP 24, HIP 10, MPT 11% 11% 0.9% 3% 10% 12% 0.9% 2% 9% 13% 0.7% 0% 0% 4% 8% 12% 16% Return Risk Sharpe Alpha HIP24 HIP10 MPT CONFIDENTIAL © 2006-2014 HIP Investor Inc. 32 Less Risk More Return
  • 33. Over 5 Years (2009-13), a HIP-Focused PORTFOLIO Proportionally Reduced RISK & RETURN vs. MPT CONFIDENTIAL © 2006-2014 HIP Investor Inc. 33 Less Risk Higher Risk-Adj. Return Higher Return * For annualized time period over the past 5 years ending December 31, 2013 (or for data since inception of strategy) RETURNS: Annualized Returns* RISK: Standard Deviation of Returns* PORTFOLIO: color of bubbles: Green = HIP Red = Vanguard Blue = Going Fossil Free Gray = MPT
  • 34. HIP-Focused Portfolios Designed to Be More “Fossil-Free” than the “Efficient Market” Portfolio Metric HIP 24 HIP 10 Vanguard 2025 Fund MPT TONS CO2 of Fossil Fuel Reserves* 731.08 2,669.14 5,179.99 7,306.48 CONFIDENTIAL © 2006-2014 HIP Investor Inc. 34 7,306 5,180 2,669 731 0 2,500 5,000 7,500 MPT Vanguard 2025 Fund HIP 10 HIP 24 Tons of CO2 * Fossil Fuel Reserves of Top 200 fossil-fuel producers; defined by Carbon Tracker Initiative, in concert with 350.org, and applied by HIP Investor to portfolio exposure
  • 35. How to Go Fossil-Free? Forward-Looking Investors CONFIDENTIAL © 2006-2014 HIP Investor Inc. 35 Author of feature on “Going Fossil Free” investing – and aligning NGO endowment portfolio with your organization’s mission Dr. Onnie Byers, PhD Chair, Conservation Breeding Specialist Group (CBSG) Part of the Global Conservation Network (GCN)
  • 36. Today’s Agenda: How Higher Impact Portfolios Can Outperform © 2006-2014 HIP Investor Inc. 36 1. Finance Foundations: Strong or Shaky? 2. The New Fundamentals of Investing 3. Evolving Into a Higher-Impact Portfolio
  • 37. Today, Investors Drive with 20% Visibility CONFIDENTIAL © 2006-2014 HIP Investor Inc. 37
  • 38. 80% of Market Value = Intangible www.AgeOfVolatility.com © 2006-2014 HIP Investor Inc. 38 83% 68% 32% 20% 20% 17% 32% 68% 80% 80%
  • 39. 5 Key Drivers Can Measure Future Risk & Value Creation Potential 1. Customer Satisfaction 2. Employee Retention 3. Carbon Efficiency 4. Board Diversity 5. Legal Exposure CONFIDENTIAL © 2006-2014 HIP Investor Inc. 39
  • 40. HIP’s Ratings Quantify & Measure the 80% that Is Ignored by Many Investors • Physical Health • Mental AgilityHealth • Income Growth • Asset AccumulationWealth • Carbon Neutrality • Reusable ProductsEarth • Gender Balance • Ethnic DiversityEquality • Transparent & Open • Credible & EthicalTrust Companies innovate to answer five human needs: Innovative Products + Services Inspired People + Teamwork Increased Profits + Returns Improved Planet + Society Which can result in sustainable, profitable growth for all stakeholders: CONFIDENTIAL © 2006-2014 HIP Investor Inc. 40
  • 41. Health Wealth Earth Equality Trust HIP’s Factors Connect Directly to Cash Flow, Profit and Shareholder Value Products & Services Operating Metrics Mgmt Practices I M P A C T “How HIP Is This Investment?” HIP = Human Impact + Profit Strategic Innovation & Risk Mitigation Higher Revenue potential Lower Cost potential
  • 42. Category Segment Growth Segment Share Food 22% 2.5% Electricity 17% 2% Fuels 20% 2.6% Health Care 17% >1% Building Products 23% 2.3% Fiber (Apparel) 50% 1% Automotive 38% 2% Fast GROWTH Markets Are Gaining Share Across Industries Source: Pegasus Capital CONFIDENTIAL © 2006-2014 HIP Investor Inc. 42
  • 43. Category Market Size (U.S. $Bil) Sustainabili ty Segment Segment Growth Segment Share Food $550 Bil Organic 22% 2.5% Electricity 400 Bil Renewable (excl. Hydro, Wood) 17% 2% Fuels 1,000 Bil Alternative 20% 2.6% Health Care 2,300 Bil CAM* 17% >1% Building Products 98 Bil Green 23% 2.3% Fiber (Apparel) 0.3 Bil Organic 50% 1% Automotive 228 Bil Hybrids 38% 2% Positive-Impact products are producing the FASTEST GROWTH categories across all sectors Source: Pegasus Capital * Complementary & Alternative Medicine CONFIDENTIAL © 2006-2014 HIP Investor Inc. 43
  • 44. If People are the “Most Important Asset,” Where are People on the Financials? CONFIDENTIAL © 2006-2014 HIP Investor Inc. 44 Human Capital People = Assets The Gap in GAAP People = Expenses
  • 45. HIP Ratings reveal Drivers of possible Higher Returns: + 5% to 33% premium CONFIDENTIAL © 2006-2014 HIP Investor Inc. 45
  • 46. HIP Ratings reveal Drivers of possible Higher Returns: + 5% to 33% premium +with Lower Risk – 10% less volatility CONFIDENTIAL © 2006-2014 HIP Investor Inc. 46
  • 47. HIP Ratings reveal Drivers of possible Higher Returns: + 5% to 33% premium +with Lower Risk – 10% less volatility CONFIDENTIAL © 2006-2014 HIP Investor Inc. 47 HIP Ratings cover $69 Trillion Mkt Value
  • 48. HIP Investor Ratings Are the GPS for Your Portfolio CONFIDENTIAL © 2006-2014 HIP Investor Inc. 48
  • 49. HIP Investor Ratings Are the GPS for Your Portfolio And 401-k Plan CONFIDENTIAL © 2006-2014 HIP Investor Inc. 49
  • 50. Millennials as Future Leaders: #1 Purpose of Business Is Building a Better World © 2006-2014 HIP Investor Inc. 50 • 80 million Millennials in USA • Inheriting $40 Trillion from Boomers
  • 51. A Millennial View on Investing © 2006-2014 HIP Investor Inc. 51 “If I don’t know how sustainable this investment fund is, I am not going to invest”
  • 52. CONFIDENTIAL © 2006-2014 HIP Investor Inc. 52
  • 53. Including Sustainability Ratings in 401(k) Plans Can Increase Employee Engagement + Education 14% 93% 0% 25% 50% 75% 100% Before HIP Info *With* HIP Ratings Participation Rate in 401(k) Plan US Average = 76% to 88% CONFIDENTIAL © 2006-2014 HIP Investor Inc. 53
  • 54. Sustainable Firms Are Aligning their 401-k Plans with their Business Goals + Employees CONFIDENTIAL © 2006-2014 HIP Investor Inc. 54 “We already see high-energy commitment and motivation towards integrating sustainability into our 401(k), and team members are excited to have the opportunity to advance sustainability in their own portfolios in parity with the value that they deliver to our clients every day.” -- Burke Pemberton, Controller
  • 55. Today’s Agenda: How Higher Impact Portfolios Can Outperform © 2006-2014 HIP Investor Inc. 55 1. Finance Foundations: Strong or Shaky? 2. The New Fundamentals of Investing 3. Evolving Into a Higher-Impact Portfolio
  • 56. At Most, 1 in 4 Fund Managers Apply these “New Fundamentals” to their Investing CONFIDENTIAL © 2006-2014 HIP Investor Inc. 56 Source: Mercer ratings
  • 57. Special Guest: Fund Manager © 2006-2014 HIP Investor Inc. 57 Garvin Jabusch Fund Manager: NEXTX Shelton Green Alpha Alum of Morgan Stanley; Thunderbird MBA
  • 58. Ariel Appreciation Investor DFA Five-Year Global Fixed-Income I iShares JPMorgan USD Emerg Markets Bond iShares International Dev Rel Est KKR & Co LP 2 INDEXES + Shelton Green Alpha Pax World High Yield Bond Individual Inv Pax World Global Envrnmntl Mkts Indv Inv iShares Morningstar Small-Cap Guggenheim Timber ETF Pope Resources LP First Trust S&P REIT Idx Parnassus Fixed-Income Pax World Small Cap Individual Inv Parnassus Workplace Calvert Global Alternative Energy A Calvert Global Water A iShares S&P 100 ETFS Physical Swiss Gold Shares RidgeWorth US Gov Sec Ultra-Short Bd I iShares TIPS Bond Praxis Intermediate Income A Guggenheim S&P Global Water Index -40% -30% -20% -10% 0% 10% 20% 30% 40% 50% 60% 70% -5% 0% 5% 10% 15% 20% 25% 30% 35% From 2011 to 2013, Many Funds in the HIP 24 Portfolio Realized Returns At or Above their Risk Level CONFIDENTIAL © 2006-2014 HIP Investor Inc. 58 * For annualized time period over the past 3 years ending December 31, 2013 (or for data since inception of strategy) IMPACT: color of bubbles: Green = higher IMPACT Yellow = medium IMPACT Red = lower IMPACT ALLOCATION: size of bubbles is percent (%) allocated to fund RISK: Standard Deviation of Returns* RETURNS: Annualized Returns*
  • 59. WisdomTree Emerging Mkts SmallCap Div TIAA-CREF Social Choice Eq Retail 2 INDEXES + TIAA-CREF Social Choice Bond Retail Vanguard Small Cap ETF Vanguard REIT Index ETF Vanguard Global ex-US Real Estate ETF Vanguard Mid-Cap ETF Templeton Frontier Markets A Guggenheim S&P Global Water Index Pax World High Yield Bond Individual Inv -40% -30% -20% -10% 0% 10% 20% 30% 40% 50% 60% 70% -5% 0% 5% 10% 15% 20% 25% 30% 35% From 2011 to 2013, Several Funds in the HIP 10 Portfolio Performed Strongly CONFIDENTIAL © 2006-2014 HIP Investor Inc. 59 * For annualized time period over the past 3 years ending December 31, 2013 (or for data since inception of strategy) IMPACT: color of bubbles: Green = higher IMPACT Yellow = medium IMPACT Red = lower IMPACT ALLOCATION: size of bubbles is percent (%) allocated to fund RISK: Standard Deviation of Returns* RETURNS: Annualized Returns*
  • 60. Vanguard Total Bond Market II Idx Inv 2 INDEXES + Vanguard Total Intl Bd Idx Investor Vanguard Total Intl Stock Index Inv Vanguard Total Stock Mkt Idx Inv -40% -30% -20% -10% 0% 10% 20% 30% 40% 50% 60% 70% -5% 0% 5% 10% 15% 20% 25% 30% 35% From 2011-2013, the Funds Inside the Vanguard 2025 Target-Date Portfolio Delivered Returns Close to their Risk Level CONFIDENTIAL © 2006-2014 HIP Investor Inc. 60 * For annualized time period over the past 3 years ending December 31, 2013 (or for data since inception of strategy) IMPACT: color of bubbles: Green = higher IMPACT Yellow = medium IMPACT Red = lower IMPACT ALLOCATION: size of bubbles is percent (%) allocated to fund RISK: Standard Deviation of Returns* RETURNS: Annualized Returns*
  • 61. iShares JPMorgan USD Emerg Markets Bond iShares iBoxx $ Invst Grade Crp Bond Vanguard FTSE Developed Markets ETF Vanguard Dividend Apprec Idx ETF Vanguard REIT Index ETF Vanguard Total Stock Market ETF Vanguard FTSE Emerging Markets ETF -40% -30% -20% -10% 0% 10% 20% 30% 40% 50% 60% 70% -5% 0% 5% 10% 15% 20% 25% 30% 35% From 2011 to 2013, Funds with Higher Risk in the MPT Portfolio Did Not Deliver the Expected Returns CONFIDENTIAL © 2006-2014 HIP Investor Inc. 61 * For annualized time period over the past 3 years ending December 31, 2013 (or for data since inception of strategy) IMPACT: color of bubbles: Green = higher IMPACT Yellow = medium IMPACT Red = lower IMPACT ALLOCATION: size of bubbles is percent (%) allocated to fund RISK: Standard Deviation of Returns* RETURNS: Annualized Returns*
  • 62. How HIP Can Help Your Portfolio, 401-k or Advisor CONFIDENTIAL © 2006-2014 HIP Investor Inc. 62 1. RATINGS on 7000+ investments + funds: Research, analyze & score 4500 Corporate equities (80% of global value), Corporate bonds ($24 Trillion), 2500+ muni bonds (half of $3.7 Trillion), treasuries & agency bonds on Future Risk & Upside Potential 2. SUBADVISE: Advisors, 401-k plans, & fund managers seeking to be more HIP 3. ADVISE: License HIP investment indexes and manage investable portfolios (including FOSSIL-FREE)
  • 63. How to Contact HIP CONFIDENTIAL © 2006-2014 HIP Investor Inc. 63 Shilpa Andalkar Senior Vice President Shilpa@HIPinvestor.com Direct: 415-857-2520 Keith Green Senior Vice President Keith@HIPinvestor.com Direct: 908-878-2144 R. Paul Herman CEO Paul@HIPinvestor.com Direct: 415-902-7741 Join SB’s NEW METRICS in Boston September 24-26, 2014
  • 64. • APPENDIX + DETAILS CONFIDENTIAL © 2006-2014 HIP Investor Inc. 64
  • 65. CONFIDENTIAL © 2006-2014 HIP Investor Inc. 65 Published 2010 (John Wiley & Sons) Bestseller List 21 University + MBA Curricula Global Libraries on 5 Continents
  • 66. 1 Year (2013) Summary Portfolio Criteria HIP 24 HIP 10 Vanguard 2025 Fund MPT TOTAL RETURN (trailing; annualized) 17.58% 14.19% 14.44% 10.74% Projected Forward YIELD 1.86% 1.96% 1.87% 2.95% RISK (annualized std deviation) 7.06% 8.10% 6.73% 9.59% Alpha (to S&P500) -2.05% -8.40% -4.47% -12.57% Alpha (to MPT) +10.26% +5.72% +7.26% 0 Beta (to S&P500) 0.75 0.87 0.73 0.90 Beta (to MPT) 0.68 0.79 0.67 1.00 Sharpe 2.49 1.75 2.14 1.12 FUND FEES: Expense Ratio (prospectus) 0.88% 0.53% 0.17% 0.13% CONFIDENTIAL © 2006-2014 HIP Investor Inc. 66
  • 67. 3 Year (2011-2013) Summary Portfolio Criteria HIP 24 HIP 10 Vanguard 2025 Fund MPT TOTAL RETURN (trailing; annualized) 10.52% 10.11% 9.58% 8.90% Projected Forward YIELD 1.86% 1.96% 1.87% 2.95% RISK (annualized std deviation) 11.29% 11.57% 9.63% 13.03% Alpha (to S&P500) -3.09% -3.74% -2.24% -6.36% Alpha (to MPT) +3.02% +2.37% +3.12% 0 Beta (to S&P500) 0.89 0.91 0.77 1.00 Beta (to MPT) 0.84 0.87 0.73 1.00 Sharpe 0.93 0.87 0.99 0.68 FUND FEES: Expense Ratio (prospectus) 0.88% 0.53% 0.17% 0.13% CONFIDENTIAL © 2006-2014 HIP Investor Inc. 67
  • 68. 5 Year (2009-2013) Summary Portfolio Criteria HIP 24 HIP 10 Vanguard 2025 Fund MPT TOTAL RETURN (trailing; annualized) 17.18% 18.74% 15.33% 17.73% Projected Forward YIELD 1.86% 1.96% 1.87% 2.95% RISK (annualized std deviation) 13.97% 14.74% 12.72% 17.15% Alpha (to S&P500) 0.23% 0.86% -0.57% -3.01% Alpha (to MPT) +3.08% +3.77% +2.35% 0 Beta (to S&P500) 0.84 0.89 0.79 1.04 Beta (to MPT) 0.80 0.84 0.73 1.00 Sharpe 1.23 1.27 1.20 1.03 FUND FEES: Expense Ratio (prospectus) 0.88% 0.53% 0.17% 0.13% CONFIDENTIAL © 2006-2014 HIP Investor Inc. 68
  • 69. In the HIP 24 Portfolio, Most Funds Have More than 5 Years of History CONFIDENTIAL © 2006-2014 HIP Investor Inc. 69 0.8 10 10 10 5.8 10 5.8 8.7 10 3.5 10 10 9.5 6.0 6.1 6.1 6.6 6.6 4.3 10 5.3 6.6 10 0 1 2 3 4 5 6 7 8 9 10 Shelton Green Alpha RidgeWorth US Gov Sec Ultra-Short Bd I Praxis Intermediate Income A Pope Resources LP Pax World Small Cap Individual Inv Pax World High Yield Bond Individual Inv Pax World Global Envrnmntl Mkts Indv Inv Parnassus Workplace Parnassus Fixed-Income KKR & Co LP iShares TIPS Bond iShares S&P 100 iShares Morningstar Small-Cap iShares JPMorgan USD Emerg Markets Bond iShares International Dev Rel Est Guggenheim Timber ETF Guggenheim S&P Global Water Index First Trust S&P REIT Idx ETFS Physical Swiss Gold Shares DFA Five-Year Global Fixed-Income I Calvert Global Water A Calvert Global Alternative Energy A Ariel Appreciation Investor Years S&P Global Clean Energy TR USD S&P Global Water TR S&P GSCI Gold Spot S&P United States REIT TR USD S&P Global Water TR S&P Global Timber and Forestry TR USD S&P Global REIT TR USD JPM EMBI Global TR USD Morningstar Small Core TR USD Cambridge Associates US Private Equity US OE Large Growth (50%) and Russell 1000 Growth TR USD (50%) US OE World Stock (33.3%), S&P 500 Sub/Environmental Services TR (33.3%), and MSCI ACWI NR USD (33.3%) US OE Small Blend (50%) and Russell 2000 TR USD (50%) S&P Global Clean Energy TR USD (50%) and Russell Mid Cap Growth TR USD (50%) 12/31/2013 12/31/2003
  • 70. In the HIP 10 Portfolio, Most Funds Have More than 5 Years of History CONFIDENTIAL © 2006-2014 HIP Investor Inc. 70 6.2 9.9 9.3 9.9 3.2 10 1.3 5.2 10 6.6 0 1 2 3 4 5 6 7 8 9 10 WisdomTree Emerging Mkts SmallCap Div Vanguard Small Cap ETF Vanguard REIT Index ETF Vanguard Mid-Cap ETF Vanguard Global ex-US Real Estate ETF TIAA-CREF Social Choice Eq Retail TIAA-CREF Social Choice Bond Retail Templeton Frontier Markets A Pax World High Yield Bond Individual Inv Guggenheim S&P Global Water Index Years S&P Global Water TR US OE Diversified Emerging Mkts (50%) and MSCI EM NR USD (50%) US OE Intermediate-Term Bond (50%) and Barclays US Agg Bond TR USD (50%) S&P Global Ex US Property TR USD CRSP US Mid Cap TR USD MSCI US REIT GR USD Russell 2000 TR USD US ETF Diversified Emerging Mkts (50%) and MSCI EM NR USD (50%) 12/31/2013 12/31/2003
  • 71. In the MPT Portfolio, ALL Funds Have More than 5 Years of History CONFIDENTIAL © 2006-2014 HIP Investor Inc. 71 10 9.3 8.8 6.4 7.7 6.0 10 0 1 2 3 4 5 6 7 8 9 10 Vanguard Total Stock Market ETF Vanguard REIT Index ETF Vanguard FTSE Emerging Markets ETF Vanguard FTSE Developed Markets ETF Vanguard Dividend Apprec Idx ETF iShares JPMorgan USD Emerg Markets Bond iShares iBoxx $ Invst Grade Crp Bond Years JPM EMBI Global TR USD NASDAQ US Broad Div Achievers TR USD FTSE Developed ex North America NR USD FTSE Emerging TR USD (50%) and FTSE Emerging PR USD (50%) MSCI US REIT GR USD 12/31/2013 12/31/2003
  • 72. The Vanguard 2025 Portfolio Combines 4 Index Funds, One with Less than a Year of HIstory CONFIDENTIAL © 2006-2014 HIP Investor Inc. 72 10 10 0.6 4.9 0 1 2 3 4 5 6 7 8 9 10 Vanguard Total Stock Mkt Idx Inv Vanguard Total Intl Stock Index Inv Vanguard Total Intl Bd Idx Investor Vanguard Total Bond Market II Idx Inv Years Barclays US Agg Bond TR USD US OE World Bond (50%) and Citi WGBI NonUSD USD (50%) 12/31/2013 12/31/2003
  • 73. How High Impact Portfolios Can Outperform: Beating Traditional Investing, Wall Street and Modern Portfolio Theory. -- Garvin Jabusch 6.25.2014 Investing for the Next Economy
  • 74. Restricted & Confidential Investing for the Next EconomyImportant Information 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. An offer may only be made by means of a private placement memorandum, prospectus and/or other governing documents, which should be read in their entirety. This information is not intended to be complete or final. The information in this document is confidential, proprietary and a trade secret of Green Alpha Advisors, and is intended only for the use of the person to whom it is given and may not be reproduced or redistributed. The presentation document does not purport to contain all of the information that may be required to evaluate a transaction and any recipient hereof should conduct its own independent analysis of the company and the date contained or referred to herein. By acceptance of this presentation, you (and your employees and affiliates) agree not to release or reveal it (or any of the information in it) to any third party and, upon request from Green Alpha Advisors, will return or destroy such information and all copies thereof. Some of the information presented herein constitutes “forward-looking information.” Forward-looking information is based on numerous assumptions and is speculative in nature and may vary significantly from actual results. There can be no assurance that estimated values or returns based on those values can be realized or that actual returns or results will not be materially lower than those stated in this presentation. Certain assumptions have been made to simplify the presentation and, accordingly, actual results may differ, perhaps materially, from those presented. In furnishing this presentation, Green Alpha Advisors reserves the right to amend or replace this presentation at any time, but undertake no obligation to update, correct or supplement any information contained herein or to provide the recipient with access to any additional information. Performance data quoted represent past performance. Past performance does not guarantee future results and current performance may be lower or higher than the data quoted. All returns shown are total returns, net of fees unless otherwise noted. Investment returns and principal will fluctuate with market and economic conditions and investors may have a gain or loss when you sell shares. Please refer to www.greenalphaadvisors.com for more information. The information in this presentation is intended to be current only as of the date of this presentation. For financial professional use only. Green Alpha is a registered trademark of Green Alpha Advisors, LLC. SIERRA CLUB, the Sierra Club logos and “Explore, enjoy and protect the planet.” are registered trademarks of the Sierra Club. 2
  • 75. Restricted & Confidential If two systems can’t coexist indefinitely, they won’t. 3 Legacy, Fossil Fuels Based Economics (BAU) + Economic Growth + Finite Planet = Bad Quantum State
  • 76. Restricted & Confidential Investing for the Next EconomyNext Economy™ Defined 4 Mega-Trend Thesis As we look to the future we envision the Next Economy; one that is ecologically efficient, helps mitigate climate change, promotes both energy security and national security and, importantly, helps produce high quality, enduring job growth. Companies in Green Alpha portfolios are selected because they are in some way working toward these goals. The world is becoming warmer and more populous, and demands on resources like water, arable land and clean air are increasing dramatically. These trends are threatening the planet’s ecosystem and world economies. Forward thinking companies around the world are innovating to address these global changes. Those that succeed will help solve civilization’s greatest challenges and stand to profit handsomely. By 'Next Economy’ we mean an innovation-driven, global economy that allows humans to thrive on earth indefinitely.
  • 77. Restricted & Confidential …Green Alpha’s Approach 5 Innovation Drives Financial Performance • All-cap, multi-sector, global growth • Environmentally conscious, financially pragmatic • Driven by science, demography and innovation • Fossil fuel free portfolios • Bottom-up investment process built on fundamentals, value analysis and a mega-trend growth thesis • Thesis Track Record Since 2008 “Sustainability is not a fad and it’s not a public relations exercise. It’s in the interest of the business community to continue to innovate through technology and increased transparency.” 1 1 Sustainability Evolves from Fad to Force, CNBC editorial, June 30, 2009
  • 78. Restricted & Confidential Shock & Awe February 2014 was the 348th consecutive month of above- average global temperatures.3 6 2.6 billion people or 39 percent of the world’s population live without access to improved sanitation.2 Projections are that by 2025, two thirds of the world’s population could be living in severe water stress conditions.1 Over 90 percent probability that human activities over the past 250 years have warmed our planet.7 The world has quietly transitioned into a situation where water, not land, has emerged as the principal constraint on expanding food supplies. 8 The cost of adapting to the impacts of a 2°C rise in global average temperature could range from US$70 to $100 billion per year between 2020 and 2050, according to the World Bank.6 “If the world waits until 2020 to take action on global climate change, it will undoubtedly be too late.” -- International Energy Agency (IEA)5 1. USAID Water and Development Strategy, p.1, 2013-2018 | 2. WHO / UNICEF Joint Monitoring Programme (JMP) for Water Supply and Sanitation, Update Report, 2013 | 3. NCDC STATE of the GLOBAL CLIMATE REPORT, National Oceanic Atmospheric Agency | 4. WHO / UNICEF Joint Monitoring Programme (JMP) for Water Supply and Sanitation, Update Report, 2013 | 5. IEA Executive Director, Maria van der Hoeven, Press Conference, London | 6. World Water Development Report, UNESCO, 2012 | 7. Intergovernmental Panel on Climate Change, United Nations, Fourth Assessment Report, 2007 | The Guardian, The real threat to our future is peak water, Lester Brown, 7/6/13 1 in 8 people world wide do not have access to safe and clean drinking water.4
  • 79. Restricted & Confidential Investment Process Key solutions to warming, resource scarcity, extreme weather, rising sea levels and increasing population. • Inexpensive, indefinitely renewed energy • Waste-to-value economics (near perfect recycling) • Careful management of scarce resources, like water and farmland Companies that deliver solutions most efficiently and profitably. • Observable high EPS growth • Proven management skill and execution • Areas of current or expected high demand 7 The most feasible, promising, fastest growing sectors. • Solar: cheap and efficient; fastest growing energy type in the world • Water management, treatment and creation • Advanced materials • Production and information efficiency gains 1. Innovation 3. Growth 2. Profitability Macro Economics Traditional, bottom up research paired with a compelling, macro-economic growth thesis based on scientific, demographic and climate trends. 1. Innovation 3. Growth Portfolio Candidates 2. Profitability Next Economy Companies
  • 80. Restricted & Confidential8 Next Economy Portfolio Construction
  • 81. Restricted & Confidential Investing for the Next EconomyNext Economy Sector Map 9 The Next Economy must reflect the broad range of human needs and desires • The Next Economy map is an overlay of sustainable principles on traditional investment sectors • It reflects practical, achievable and innovative approaches to population growth, resource scarcity and climate change
  • 82. Restricted & Confidential Investing for the Next Economy Waste to Value Adding recycled materials back into the value chain for high-end consumer goods; minimizing the need to source from the planet. Natural & Organic Foods Addressing strong consumer demand in developed countries, population growth in developing countries and soil/water health. Agriculture Organic agriculture is a key means of stabilizing soil, managing water, mitigating pesticide risk and feeding a growing population. Transportation Zero emissions transportation and capacity to store power from renewable sources are both key to decarbonizing the economy. Water Fresh water scarcity is one of the primary systemic risks for the economy as well as a leading cause of political instability. Next Economy Means All Sectors
  • 83. Restricted & Confidential Next Economy Means All Sectors 11  Sector Diversification of the Green Alpha Next Economy Universe (3/31/14)  We seek opportunities in sustainability solutions across all parts of the economy  Currently 29 sectors represented
  • 84. Restricted & Confidential12 Next Economy Portfolio Construction
  • 85. Restricted & Confidential Investing for the Next EconomyNEXTX Accolades 13 Standout performance Morningstar Rankings: • #1 fund in Morningstar’s Large Growth category for Q2 2013 (1,821 funds) • #1 fund in Mid Cap Growth category for Q4 2013 • Top 1% in Mid Cap Growth category 6 months ending 9/30/13, 12/31/13 and 3/31/14. • Top 1% in Mid Cap Growth category for first full year (710 funds) • Top 2% in Mid Cap Growth category for Q1 2014 (758 funds) • 1-Year MStar Upside Capture Ratio: 149.96 (4/30/2014) • 1-Year MStar Downside Capture Ratio: 69.71 (4/30/2014) #1
  • 86. Case Study and Fossil Free Thesis Garvin Jabusch 6.10.2014 Investing for the Next Economy
  • 87. Restricted & Confidential Investing for the Next Economy Price of Installed Solar Capacity 1977-2013 Texas: From Legacy to Next Economy Fuel Powerhouse The sunshine that falls on Texas in ONE month contains more energy than all of the oil that has ever been pumped in the state.2 Wattage Capacity, Cash Rich Solar Power Just a bit further “offshore” 1977, $76.67/watt1 1 Bloomberg New Energy Finance, 2014 2 http://www.sela.org/research-resources/solar-industry-data 3 The projected timing of climate departure from recent variability, Camilo Mora, Nature, October 10, 2013 2013, $0.46/watt “We’re approaching irreversible warming as temperatures reach a ‘climate departure’ point from their historical averages” 3
  • 88. Restricted & Confidential Investing for the Next EconomyCase Study Ticker: FSLR EPS: $4.05 2 Div/Yield: - Market Cap: $ 6.02 billion2 Next Economy Solar Energy: PV, thin film Category: Overview:  Vertically integrated capabilities improving every aspect of the solar value chain. One of the largest solar project pipelines in the world (currently nearly 3GW contracted.)  Strongest balance sheet in the industry, >$1billion in cash. Key partnerships with industry leaders like General Electric and Berkshire Hathaway.  Market leader with virtual monopoly of advanced thin film PV IP and production, having recently acquired GE’s thin film tech division and patent portfolio. FSLR $60.101 Trailing 12 month performance versus the S&P500 First Solar, Inc. 16 1Yahoo Finance, accessed 5/15/14 2Trailing 12 month numbers, Google Finance , accessed 5/15/14
  • 89. Restricted & Confidential Investing for the Next EconomyTransition to the NEXT ^Economy 17 Solar and Wind will make up 90% of the power supply by 2050 Avoiding fossil fuels is not about divesting • Green Alpha’s model of an indefinitely thriving economy by definition precludes the idea of investing in fossil fuels since they clearly cannot be civilization's primary energy source for much longer. Jacobson, Mark Z., et al., “A Roadmap for Repowering California for all Purposes with Wind, Water, and Sunlight.” Stanford University. March 11, 2014
  • 90. Restricted & Confidential18 Our Belief Green Alpha is Fossil Fuel Free For us, avoiding fossil fuels was never about divesting. Rather, our model of what an indefinitely thriving economy could look like by definition precluded the idea of investing in fossil fuels since they clearly cannot be civilization's primary energy source for much longer. “We’re approaching irreversible warming as temperatures reach a ‘climate departure’ point from their historical averages” 1 1 The projected timing of climate departure from recent variability, Camilo Mora, Nature, October 10, 2013
  • 91. Restricted & Confidential19 Next Economy Portfolio Construction. The Eco-Efficient Frontier.
  • 92. Restricted & Confidential20 Contact Information Facebook facebook.com/Green AlphaAdvisors Twitter Twitter.com/AlphaV erde LinkedIn Linkedin.com/company/ green-alpha-advisors 4760 Walnut Street, Suite 106, Boulder, CO 80301 303 993 7856 info@greenalphaadvisors.com Blog sierraclub.typepad.com/ga a
  • 93. How High Impact Portfolios Can Outperform: Beating Traditional Investing, Wall Street and Modern Portfolio Theory. Garvin Jabusch 6.10.2014. Investing for the Next Economy