By Michael Brush
It’s nice to think you can “do well by doing good” in green investing, as the cliché goes. But that’s hit or miss with mutual funds. Typically, more than half of active fund managers lag behind their benchmarks.
But Garvin Jabusch at Shelton Green Alpha Fund (NAS:NEXTX) actually makes it happen. His “green” fund beats its Morningstar mid-cap growth category and U.S. mid-cap index by 15 to 17 percentage points annualized over the past three to five years, according to Morningstar Direct.
That’s huge, and it is no easy task. So I checked in with Jabusch to see what he does to get this outperformance. Here are the three core strategies he says contribute to his superior performance, with stock examples.
1. Find companies that trade at a discount
Business schools have entire classes on how to calculate intrinsic value. We can’t get into all the details here. But at a high level, it’s key to find companies that stand out because they take an entirely different approach to solving some problem. This supports long-term value creation.
Using this starting point, Jabusch and his team then estimate the intrinsic value of candidates five years from now. If the discount is big enough, the stock looks attractive. Since Jabusch has a great record, let’s take his word for it on the long-term intrinsic value discount, with the following examples.
Crispr Therapeutics (NAS:CRSP) : The current stock price of this gene-editing company in the $60 range will look cheap in five years, says Jabusch. Growth companies that don’t report earnings — such as this one — have been sold down hard in the flight to value and “safety.” Take advantage of the discounts.
“I find it shortsighted to sell something because it doesn’t have earnings today, when it is just so visibly valuable,” says Jabusch. Crispr Therapeutics is off nearly 60% from highs last July.
But its revolutionary technology for gene editing may create an entirely new class of therapies for diseases that biotech has so far failed to treat well. Crispr is working on therapies for sickle cell disease and another blood ailment called transfusion-dependent beta thalassemia. It is also developing allogeneic cell therapies to treat cancer.
This biotech company bases its technology on CRSPR, which stands for “clustered regularly interspaced short palindromic repeats.” Those are biological systems that can be programmed to target specific parts of genetic code for precision editing of DNA.
Caribou Biosciences (NAS:CRBU) : Another example that looks attractive is Caribou Biosciences, which has its own version of the CRISPR platform. It is developing cancer therapies, including one that blunts the response of the immune system to improve the effectiveness of cancer therapies. The stock is down over 65% from highs last September.
2. Own innovators with intellectual property
“Value always rolls up to the owner of the IP,” says Jabusch, referring to intellectual property. Crispr Therapeutics and Caribou Biosciences serve as great examples. They have the CRISPR gene editing IP developed by Crispr founder Emmanuelle Charpentier and Caribou founder Jennifer Doudna. Both won the 2020 Nobel Prize in chemistry for developing this form of gene editing.
Here are three other examples of companies with exclusive IP that should benefit shareholders over the medium term.
Maxeon Solar Technologies (NAS:MAXN) : This company has solar panels that squeeze more electricity out of the sun. They cost more, but they last longer, which offsets the higher cost. The company says its panels can last 40 years. The panels also outperform in partial shading and at high temperatures. Maxeon says its Maxeon 5 panels deliver 60% more energy than conventional panels. Maxeon panels are for businesses and homes. It says its Performance Line panels for utilities deliver 13% more power.
Canadian Solar (NAS:CSIQ) : This is another company whose solar panel technology offers customers good bang for the buck, says Jabusch. Most of its manufacturing is in China, a possible risk factor if the geopolitical situation worsens.
ASML (NAS:ASML) : Microchips are at the heart of major business trends, from artificial intelligence and the internet of things, to the cloud and sustainable energy. The big trend in semiconductors is a move to smaller chips with more power. This means cramming more transistors into less space.
ASML is a key player because it has a sophisticated lithography system. It uses shorter wavelengths of light to cram more detail onto wafers. In lithography, light is projected through a blueprint of a pattern that gets printed on silicon wafers.
3. Favor companies that lower systemic risk
Jabusch is a great example of a portfolio manager who came into the industry from out of left field. Yes, he has an MBA, and he booked a lot of experience at Morgan Stanley. But he also spent five years studying anthropology and archaeology at the University of Utah. I don’t meet many fund managers who studied archeology.
This background gives Jabush a different way of looking at the world, which may help his fund’s outperformance. “The more you look at ancient civilizations, the more you see what structural risk caused them to degrade and collapse. Very often it is the same things. Political instability caused by acute levels of inequality,” he says. “Or it can be a resource problem caused by drought.”
Another major cause: disease. “This tells me what I need to avoid investing in to lower the structural risk of my portfolio,” says Jabusch. “If I want to future-proof my portfolio, I don’t want to own the causes of the risk. I want to own the solutions for it. Especially when they have intellectual property and a cheaper product.”
In short, favor companies that reduce systemic risk caused by climate change, disease and scarcity of resources, such as water. “We are seeing nation states and cities and individuals fall over themselves to reduce systemic risk,” he says. You want to be in the companies they turn to for help. This way, you are positioning for what Jabusch calls the Next Economy, or one where solutions to systemic risks have been implemented. This explains his fund ticker NEXTX.
This isn’t a “Zen thing.” It’s just investing strategy that is “our best opportunity to preserve and create wealth,” he says.
Moderna (NAS:MRNA) : A great example of how this big-picture perspective can pay off for you is Moderna.
Moderna develops ways to tweak messenger RNA, which transfers information stored in our genes to cells, to tell them how to carry out essential tasks. Jabusch owned Moderna pre-Covid because he liked the potential of this intellectual property to develop vaccines and therapies.
Then Covid hit. Shareholders like Jabusch benefited from their forward-thinking because Moderna was well-positioned to develop a Covid vaccine. The stock advanced over 2,200% from where it started 2020. It’s still up over 800% after paring some gains.
Given his long-term investing horizon, Jabusch is probably not selling. It’s his second-largest position, at over 4% of the portfolio. A lot of mutual fund managers cap position size at 2% to reduce risk, so this is a sign of conviction.
All of the companies above check the box for lowering systemic risk and contributing to the “Next Economy.” Maxeon Solar Technologies and Canadian Solar help advance de-carbonization. ASML helps create chips in products that do the same. Besides reducing the burden of disease, Crispr Therapeutics’ and Caribou Biosciences’ gene editing may help deal with climate change by creating algae that make plastics now produced from petroleum, or crops that are more drought-resistant, more nutritious or able to hydrate with sea water.
Here is one more example.
Brookfield Renewable Partners (NYS:BEP) : This “clean” energy company invests in hydro, wind and solar power generation plants in North America, Latin America, Europe and Asia. It also invests in companies developing fuel cells and power storage. It’s one of the largest pure-play public renewable companies in the world. “Brookfield won’t be a fast grower, but it provides ballast in the portfolio,” says Jabusch.
Like all his stocks, Brookfield looks cheap relative to its long-term intrinsic value, in his view. It also pays a 3.2% dividend yield.
Michael Brush is a columnist for MarketWatch. At the time of publication, he had no positions in any stocks mentioned in this column. Brush publishes the stock newsletter Brush Up on Stocks. Follow him on Twitter @mbrushstocks.