Garvin Jabusch is the co-founder and CIO of Green Alpha Advisors. Financial Advisor contributor Paul Ellis recently interviewed him to discuss Green Alpha Advisor’s Next Economy investment model.
Ellis: Garvin, tell FA magazine’s subscribers about Green Alpha Advisors’ Next Economy Investment thesis.
Jabusch: Sure, Paul, what we mean by what we call Next Economics is a contrast to modern portfolio theory, which emphasizes having sector allocations comparable to whatever benchmark you are correlating your portfolio to.
We don’t try to mimic a benchmark or exhibit low tracking error for a very simple reason. Our objective is to model what we think an economy five to 20 years hence will look like as the world gets more economically efficient and we continue solving for our largest systemic risks, including climate change, resource scarcity and the degradation of arable farm land.
We envision a future economy where we’ve de-risked a lot of these uncertainties and addressed underlying problems. We then go about modeling what that economy will look like and build portfolios to reflect it—as opposed to reflecting the present day economy, which is the cause of many systemic risks.
In simplest terms, Next Economics is the practice of investing in the solutions to systemic risks and never investing in the causes.
Ellis: In your model you talk about going from the legacy economy to the Next Economy. How we make that transition raises systemic risk questions in the minds of many investors and advisors. Please share your perspective on these concerns.
Jabusch: You’re raising the question of what is the practical application of Next Economics, or how advisors should think about the transition and how clients can invest in it and benefit from it.
First, we think there is a Next Economy analog for every sector and company in the legacy economy. These analogs can help mitigate systemic risk during the transition. An obvious example is generating electricity using solar energy versus burning coal. This example meets both Next Economy requirements. First, it does not cause systemic risk and has the potential to mitigate it. Second, it is a viable, scalable solution. So it’s more economically efficient and generates wealth.