Tom Konrad, CFA
An interview with John Segrich, CFA,
portfolio manager at the the Gabelli
Green Growth Fund (SRIGX)
When I did my recent past
comparison of clean energy mutual funds, I found that
Growth Fund (SRIGX and SRICX)
beat all its rivals by a long shot over the last three years, earning a
coveted five-star rating from Morningstar. In general, I'm a
skeptic about short-term past performance: If you look at enough funds,
sooner or later you'll find one that has had great performance by sheer
luck. Even when a few years' out performance is not luck, it may
be the result of a fortuitous alignment: the fund's strategy could be
particularly suited to recent market conditions. When those
conditions change, so will fund performance.
Nevertheless, I do believe that some
can consistently beat index funds, especially in an
emerging and little-understood sector like clean energy. I manage
clean energy portfolios myself, and if I didn't think that I could do
better than indexing, I'd just buy an ETF, and spend the rest of my
time more productively by taking up calligraphy.
Unless you're reading this article in elegant script on a rice paper
scroll, you can assume that I have not taken up calligraphy. I
believe some portfolio managers can consistently beat the market.
How can we tell which money mangers are skillful, and which ones are
just lucky? The only way I know is to understand their investing
process. Which is why I asked John Segrich, CFA, the lead manager
for the top-performing Gabelli Green Growth Fund, to submit to an
interview. In our interview, I try to understand his investing
process, and if he has been benefiting from a temporary alignment of
the (Morning)stars, or if there is some lasting advantage that future
investors in his fund can take advantage of.
Our interview follows:
TK: Please tell us a little about your background and why you
manage a sustainable mutual fund.
JS: While in college I interned at Gabelli & Company and upon
graduating was offered a position as a full time analyst. I spent the
next two years looking at emerging internet companies while at
Gabelli. I then spent another two years on the buyside as a
technology analyst. I moved to London with Goldman Sachs in 2000 and
headed up their European Internet and then software research teams
for a few years. I remained in London with JP Morgan as the head of
their European sell side technology research team. In 2008, I moved
back to New York and back to Gabelli & Company to head up their
green research efforts. The firm then refocused an existing SRI
mutual fund on sustainability in 2009. I also manage a hedge fund
with a similar sustainability strategy.
The reason for my interest in managing a fund focused on
sustainability is two-fold. First, I believe that by managing a
portfolio of investments focused on sustainability, I can have a
positive impact on the world with regard to these pressing issues.
Secondly, we believe that by investing in these companies, we can
achieve superior returns in the long run.
TK: Who are your investing role models?
JS: Mario Gabelli, our Chief Investment Officer, has been and
remains my mentor over the years. His approach to investing is rooted
in deep, fundamental research and in understanding the entire value
chain on a global basis. He taught me to dig deeply into the numbers,
read the footnotes, and ask the tough questions. He also is able to
take a longer term view of companies and industries, and look through
the short term fluctuations to identify value.
George Soros, a fellow philosophy major, also influenced my
investment process through some of his writings, in particular in
identifying the perception gap within an investment and understanding
how the closing of this gap creates value.
I also admire some of the more visible hedge fund managers such as
David Einhorn at Greenlight Capital or Bill Ackman at Pershing Square
who relentlessly pursued their investment views even when the whole
market was telling them they were wrong. They performed their own
analysis and were firm in their conclusions despite the market
telling them otherwise. Too often there is not enough analysis and
many investors just take management’s view as the truth without
testing those assumptions. The assumptions need to always be tested.
TK: What factors do you consider when deciding if a company is
JS: Sustainability for us is to understand the impacts,
opportunities, constraints, and issues that emerge as the world
population grows from 6.8bn people. If we take that lens, and overlay
it on any traditional sector, it helps us identify where we should
look to find investment opportunities.
The starting point for us is to understand the industry on a
global basis, analyze supply and demand, and then determine if the
economics “make sense.” Can the companies and the industry
survive on its own, or do they depend on the handouts of governments?
If the industries are subsidy driven, we tend to look for wider
margins of safety when investing and may be shorter term investors.
If the industry is “sustainable”, then we can invest in solid
business models for the long run.
TK: Do you believe sustainability confers a long term
advantage to companies?
JS: By definition yes, since companies that do not embrace or
understand sustainability issues that impact their business will
likely not survive. In addition, we believe that the companies we are
investing in are exposed to higher growth drivers due to their
focusing on solving sustainability issues and therefore likely offer
better investment opportunities combined with secular growth themes
than those that are less exposed.
TK: Please describe your stock selection process.
JS: We start with the industry and attempt to understand the
entire value chain. For example as we look to invest in the wind
industry we start by identifying the companies that own and operate
wind farms (typically renewable utilities). We identify all the
turbine manufacturers, then break down the turbine into its
components and identify all the companies that make blades, bearings,
even the carbon fiber that is used in the blade. Through this process
we look for areas of constraint in the value chain as investing in
those often is quite profitable due to better pricing, margins, and
profits. We then establish where we want to have exposure on a global
basis – maybe we want exposure to the Chinese wind market but not
the European market. After that, stock selection comes down to
fundamental analysis and valuation. We also try to incorporate issues
such as regulation, currencies, and other macro issues like credit
TK: Recently you have been trading much more than the other
fund managers I follow, holding your average position only about 6
months, while most funds I follow hold positions on average about two
years. Is frequent trading intrinsic in your strategy?
JS: Yes, at the moment, as many of these industries are still
heavily dependent on subsidies for survival. As those subsidies
change, we may need to change our outlook on the industry. We have
also been through several rounds of sovereign debt concerns, which
have a broad impact on many companies in the investment universe.
Over time, as the industries mature we would expect to be able to
have longer holding periods. In some industries, we can already
identify what we believe are long term investments.
TK: Your track record over the last three years has been
excellent. The Gabelli SRI Green Fund is the only one I follow that
is up since the start of 2008, and you're up 21% since then, while
the next best performing fund is down 17% over the same period. Why
do you think you've been so successful?
JS: We have deliberately attempted to be global in our
understanding of the value chain. Often, we can gain exposure to an
investment theme in a less obvious way – sort of the picks and
shovels approach to investing. We also have decided that we do not
need to maintain exposure to all areas of sustainability and when
subsidies are in flux, we might reduce our solar or wind exposure to
TK: Your fund is still quite small. What are the advantages
and disadvantages of the small size?
JS: Certainly a smaller fund size helps us in terms of being able
to enter and exit positions more rapidly if needed. Hopefully, as
more investors realize the opportunities of investing in this manner,
the fund will continue to grow. We do not foresee growth in the fund
size as a barrier to achieving returns. Moreover, as the fund grows
in size, the expense ratio will become less of an issue.
TK: Have you seen a substantial increase in investor inflows
now that you've achieved Morningstar's highest five-star rating due
to your track record?
JS: Yes, it has helped. I know that we have been on the radar
screen of many advisors, and getting the five star rating often marks
the trigger point for their investment process.
TK: Let's switch gears and talk about the market. What do you
expect the next year to bring to the market as whole and sustainable
companies in particular?
JS: I suspect that the market will remain choppy as many of the
issues we are grappling with, such as European sovereign debt and
even the debt that is mounting here in the US, will not be easily
solved. Subsidies are under pressure and while some nations, such as
Germany and China, have made strategic decisions to embrace
sustainability issues, others, such as the US, have not. As countries
continue to compete with each other for leadership in these
industries (the space race of our generation), we expect a new engine
of job creation and growth to emerge.
TK: Are there any sustainable sectors you expect to do
particularly well in the coming year? Why
JS: We are generally cautious on the renewables at the moment as
we believe overcapacity will lead to dramatic price declines which in
turn will eventually lead to accelerating growth. That growth comes
in waves; we believe third quarter 2010 was the peak. We will spend
our time looking for the next entry point, when we believe shares
have bottomed. We continue to focus on materials and commodities that
will benefit from global growth. Industrialization and urbanization
of the developing world remain important themes. We also continue to
focus identifying companies that have exposure to longer term secular
growth drivers, but that make simple products which will benefit if
the industry takes off rather than by having to identify an
individual company. Again, we often follow the picks and shovels
approach to investing. Several battery and materials companies fit
TK: What are your top holdings right now? Why do you expect
them to do well?
JS: Some of our holdings at the moment include Sino-Forest
(TRE.TO), Umicore, Polypore
Metals (GSM), Duksan
Johnson (MJN), and Novozymes
(NVZMY.PK). Most have
high exposure to stronger secular growth drivers and are strong
beneficiaries of the growth in emerging markets. They also may
benefit if the US dollar continues to weaken.
TK: What have you sold recently and why?
JS: We have sold most of our exposure to renewable, in particular
solar, as we believe the market is entering a period of overcapacity
and that margins have peaked. Additionally, market expectations have
caught up to our view and the valuation gap had closed.
TK: Is there anything else you'd like to say?
JS: Just that we believe we are at the beginning of a significant
investment opportunity that has only recently shifted from marginal
to mainstream. We are looking at issues that could unfold over the
next 10, 20, even 50 years and we believe there is still substantial
value to be created by investing in the companies that are leading
TK: Thank you for sharing your insights with us today.
JS: You are welcome. Anytime.
In general, I like what John had to say. His process starts
with understanding the value chain. Because Clean Energy is such
a new field, understanding the value chain is something many investors
do not bother to do. Until Clean Energy becomes mainstream,
this should be a lasting source of advantage. He trades
frequently, but with good reason: in reaction to the quickly shifting
structure of subsidies that currently supports most clean energy
technologies. This should also be considered an advantage, at
least until subsidies are not longer such a major factor in the
profitability of many clean energy companies.
I would not be as complacent as he is about the costs of fund
size... as assets under management grow, opportunities to invest in
microcap companies disappear, as the money the fund would need to
invest quickly dwarf's the stock's liquidity. However, the
advantages of fund size in the ability to spread management costs over
a greater number of assets will probably be more significant than
increasing liquidity costs for quite a while to come.
Would I invest in the Gabelli
Green Fund? The short answer is "yes." If you agree
with me that active
pays in alternative energy and climate change funds, then
you should choose the fund that can make the best case for having the
best manager. If you're not convinced, you probably should not
the mutual fund with the lowest costs, since you can acheive
much lower costs with an ETF. But if you want to hedge your bets,
the two funds that seem to have a good balance of low
allocation, and past
performance are the Winslow
(WGGFX), and the New
Not convinced? Next week I'll take a look at the Clean Energy ETFs,
DISCLAIMER: The information and
trades provided here are for informational purposes only and are not a
solicitation to buy or sell any of these securities. Investing involves
substantial risk and you should evaluate your own risk levels before
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performance. Please take the time to read the full disclaimer