Third Quarter 2014 GEOS Review – Emphasis on Nexus

During the third quarter of 2014, global equity market returns were driven by the U.S., and the “largest of the large” market capitalization stocks in particular, with the S&P 500 Index returning 1.1%. In contrast, small-cap equities underperformed, with the Russell 2000 Index posting a -7.4% return amidst the “de-risking” environment. With investor concerns regarding declines in EU economic footing and a stronger U.S. dollar, the MSCI World Index returned -2.1%. Additionally, investors observed and anticipated a further weakening of China’s economy, as well as other emerging markets, which led to an associated drop in commodity prices late in the quarter, led by oil. Investors mistakenly correlated the decline in oil prices with weaker fundamentals for clean technology equity shares.

The Essex Global Environmental Opportunities Strategy (GEOS) is focused on global, high growth, smaller companies who garner significant sales from the emerging markets. Against this broad and negative backdrop, GEOS posted an -11.6% return, versus -8.2% for the Wilderhill Clean Energy Index (ECO), given the European shares owned in GEOS. We believe that the majority of GEOS quarterly under-performance was caused by a “risk-off” trade, in which the more leveraged equity shares were bid-off in relation to larger stocks with more mature financials. Across the GEOS themes and related holdings, clean tech fundamentals remain sound, and in some cases such as LED lighting, continue to improve.

LED lighting is one of our highest conviction industries. The LED industry is classified in the GEOS clean tech and efficiency theme, with holdings primarily located “downstream” in lighting systems, installation and specialty applications. Over the course of the quarter, we took advantage of some stock price compressions  to add to GEOS LED exposure, especially “downstream”, amidst high quality LED lighting installers.

Solar shares were generally weak over the quarter, given the growth characteristics of the sector combined with the misperceptions referenced above regarding weaker oil prices. The GEOS solar portfolio primarily consists of solar project developers, vertically-integrated solar module manufacturers and installers, as well as solar park owners and operators. While solar shares have corrected during the third quarter, we maintain a 30% growth forecast for the solar sector through 2015, and believe demand will continue to be driven by solar energy grid parity situations in the U.S. Sun Belt, as well as important markets such as Japan, Chile, S. Africa and Australia. Additionally, distributed solar, i.e. commercial rooftop projects by retailers and warehouse operators is driving U.S. solar demand, as companies seek to own energy assets at point-source, lowering operating costs and increasing capital flexibility. Despite share weakness, we are observing increased global solar demand coupled with tightening manufacturing capacity, which will benefit solar manufacturing equipment firms.

Amidst the equity market volatility, we are experiencing unprecedented inquiries regarding clean tech investing, GEOS, and discussions regarding fossil fuel divestment (FFD). Mainstream investment consulting firms are seeking to learn more about our social impact investment solution with GEOS, and where it could fit in a solution for FFD, or reinvestment. While GEOS is a solution for the rising interest in social impact investing, we remain fully committed to ensuring GEOS is the nexus of environment and finance. GEOS provides a completion strategy, providing exposure for investors wanting natural resource optimization, providing energy efficiency solutions while lessening dependence on fossil fuels and limiting greenhouse gasses. We use the term nexus as we believe, and have demonstrated that GEOS can provide exposure to technologies that are solving environmental, social and economic challenges, while providing an above-market return in equity securities. We maintain a long-term perspective in our investment discipline, and employ risk management through our focus on commercially viable technologies and industries. Yes, clean tech shares have been volatile, but this is what makes a market, and an investment solution by harnessing social challenges with financial management. We maintain that GEOS captures a long-term and secular mega-trend, and we are still in the very early innings.