Tom Konrad Ph.D., CFA
Until recently, green income investing was an oxymoron.
Most companies people think of as green (think Tesla Motors (TSLA) or First Solar (FSLR)) are relatively new companies that are investing all of their profits (such as they are) back into the business. Meanwhile traditional income sectors like utilities, oil and gas, and coal mining are deeply tied into fossil fuels. Real Estate Income Trusts (REITs) are the sole exception. A REIT is as green as the property it owns, and a few such companies are real leaders in sustainable buildings… but not nearly enough to build a diversified portfolio.
The Birth of the Global Green Equity Income Portfolio
In 2013, with the IPOs of Hannon Armstrong (HASI), NRG Yield (NYLD and NYLD/A), and Pattern Energy Group (PEGI), there were finally enough high-income green stocks (if you include international stocks) to build a diversified portfolio. In December of 2013, I teamed up with Green Alpha Advisors to manage a green, fossil fuel free portfolio designed produce a high level of dividend income which we hoped to persuade Shelton Capital Management to use as the basis of a mutual fund, joining the growth-oriented Shelton Green Alpha Fund (NEXTX) as a natural complement.
Fossil Fuel Free, or Green?
We chose to make the portfolio fossil fuel free (FFF) because that is part of the Green Alpha brand. They have one of the strictest definitions of FFF in the industry, and it is an important part of their identity. My own definition of green is considerably broader. For me, a company is ‘green’ because of its effect on the environment. If our economy would be doing more damage to the environment if the company did not exist, or if the environment benefits as the company grows, then the company is green.
In 2014, I started to become frustrated with the difference between our definitions of green. The pure fossil fuel free approach eliminated several of the most attractive green income stocks from the portfolio. These included Brookfield Renewable Partners (BEP), TransAlta Renewables (TSX:RNW or OTC:TRSWF), Primary Energy Recycling, and Capstone Infrastructure. The last two don’t have stock tickers because they have been (profitably for investors) bought out since then.
In order to hedge my bets in case Shelton decided to pass on the mutual fund, and because of this frustration, I started a second seed fund in May 2015. This second fund used the same approach, but my own, broader, green criterion. I call this second fund the Green Global Equity Income Fund GGEIP, and the fossil free version FFFGGEIP.
Both portfolios have built up strong track records, as you can see from the following (after fees) performance chart and table below. In 2014, there was no index of high income green stocks, so I have used the SDY, SPDR S&P Dividend ETF of general high income stocks as a benchmark. In May 2015, YLCO, the Global X YieldCo ETF, which does focus on high income green (but not fossil free) stocks as a benchmark from that point on.
|Fund/Benchmark||2014 Total Return||2015 Total Return||1/1/2016 to 5/31/2016 Tot.Return||Annualized since inception|
Seeking Mutual Fund Companies
Despite the strong performance, Shelton decided to take a pass on either version of GGEIP last year, and I have been looking for a different mutual fund company to launch the fund since. I’m currently speaking with two.
Since this would be a new category of mutual fund, both are uncertain as to total demand. To me, the need seems obvious. The need for current income is common for retirees, as well as endowments and foundations. A report from Bloomberg New Energy Finance identified the difficultly in replacing high income fossil fuel stocks as a sticking point for investors seeking to divest from fossil fuels. So the demand for a high income green alternative will come from anyone who currently owns REITs and MLPs, but wants to divest from fossil fuels.
Why I Built The Green Equity Income Motif
While I was pondering how to demonstrate the demand for my fund, Jigar Shah, the President of private clean energy infrastructure investment fund Generate Capital suggested that I start a Motif on the Motif Investing platform. Jigar was also a co-founder of SunEdison (SUNEQ), but he left long before the company got itself into its latest troubles. He can also be heard weekly on my favorite podcast, The Energy Gang (Soundcloud, iTunes).
The Motif platform allows investors to essentially build baskets of stocks (Motifs) that they can buy and sell like exchange traded funds for a single $9.95 commission on a $3000 , but without the ongoing expenses of an ETF.
I thought it was an excellent idea, and easy to implement, so I created the Green Equity Income Motif.
I can’t replicate the GGEIP strategy on Motif for three reasons:
- Motifs only include stocks on US exchanges.
- Adjusting or rebalancing the holdings in a Motif requires additional trades.
- I use covered calls and cash covered puts in GGEIP to lower volatility and increase income. Such option strategies are not available on the Motif platform.
Offsetting these disadvantages is the large advantage of cost- you can buy the entire Motif for a single commission. And these disadvantages are also an advantage in that the people who may be interested in the Green Equity Income Motif are not likely to be the same ones who will want the mutual fund… but they can still help me demonstrate demand.
If there is significant demand for my Motif over time, I’ll update it at least every year to add new green income stocks that go public and replace ones which get bought out. I’ll also re-weight the Motif towards the stocks that I think have the best chance of doing well in the coming year. I called this first version the “Green Equity Income Motif 2016” to distinguish it from future versions, but I intend to update it more than once a year assuming there is demand and market conditions change.
How You Can Help (and get $100 for your efforts)
If you would like to help me start my fund, or just want a cheap, easy way to invest in my green dividend income ideas, here’s how:
You can get $100 for opening a new Motif account now (I also get $100 for referring you.) When someone buys the Green Equity Income Motif or future motifs I create, I’ll get $1 as well.
Even if what you really want is the fund, the $100 bonus for signing up for the Motif account is a nice compensation for your trouble… you can always sell the Motif and use the money to buy the fund when it’s available.
I know most of my readers are active investors and are more interested in investing their own money, rather than using a mutual fund or even a Motif. If that is you, please consider this idea for that friend who has been asking you for advice.
Disclosure: Tom Konrad will receive $1 for each purchase of GEIM on the Motif platform, and $100 for each new Motif customer who signs up through the referral link. Tom Konrad manages and invests in The Green Global equity Income Portfolio, which owns HASI, PEGI, NYLD/A, TRSWF and BEP, as well as most of the stocks in the Green Equity Income Motif.
DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results. This article contains the current opinions of the author and such opinions are subject to change without notice. This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.
Tom, long time reader, first time commentor, do you know if there is any kind of restriction for Canadian’s for this? Can I put this motif into my tax free account?
Either way, best of luck with this, using this site and my approval for my bank I’ve pulled 10% returns for the last two years, so thank you very much.
Thanks for your interest.
Getting a Motif account should work like opening an account with any other domestic US broker, but I don’t know how difficult that is.
According to the US/Canada tax treaty, US dividends in your tax free retirement account should not be subject to withholding by the US (the same is true for me when I invest in Canadian stocks) but in practice, sometimes dividends are withheld- this depends on the particular broker and stock. If they are withheld, you’re entitled to recover them, but in my experience it’s virtually impossible to recover money withheld by the CRA for a US retirement account. Hence, you should call Motif and ask them before using your retirement account, or just use a taxable account. For a taxable account, you with have withholding, but you can take it as a tax credit on your returns.