The industry veteran makes the case for ditching fossil fuels and shares his 2019 outlook
1. How much does Genus Capital manage, and how do you approach investing?
Genus manages about $1.5 billion of assets, and we’ve been around for coming up to 30 years [in 2019]. We’re a quantitative firm; we have models that help us select stocks. We look at different factors, like value, growth, momentum and technicals, to help us build models that have some predictive ability.
We also have a macro model to help us make decisions on the asset-mix side. We have $1 billion of wealth management and $500 million of foundation, institutional type monies. About $500 million is this fossil-free, ESG [environmental, social and governance]–type mandate. It’s the fastest-growing part of our business. It’s grown from $75 million five, six years ago.
2. Vancouver-based Genus was early to the divest-invest movement. Why did you go down the path of divesting from fossil fuels and investing in climate change solutions?
We had clients at the forefront of the space, like [the] David Suzuki [Foundation]. They came to us and said, “Look, we don’t want our capital contributing to climate change.” You’ve got to draw the line somewhere, and our clients drew it at companies that produce, refine and transport hydrocarbons.
We’ve been managing socially responsible money for 25-plus years, and so this was a new addition to the [investment] screens we had, and an impactful one, when you think of how exposed Canada is to the energy sector.
I’ve been saying for five years, I don’t need hydrocarbons to get performance. Our research bears it out, and also our live performance.
3. Oil and gas play a big role in the Canadian economy, and many British Columbians are excited about the recently approved liquefied natural gas facility in Kitimat. What do you say to investors who see fossil fuels as an important part of their portfolio?
Energy is 6 percent of global capital markets. It’s only here in Canada that we have exposure. Canada itself is a small corner of global capital markets, as is energy. So there’s a lot of other choices and alternatives out there to create wealth.
We went back 45 years and did simulations to take out the energy sector and replace it with others that have similar correlation or covariance to energy—economically sensitive sectors. We discovered that we could take out [oil] and have more technology, financials, consumer discretionary and telecom. Those four sectors tend to overweight in our fossil-free mandates, and they have correlation with energy, the same kind of economic sensitivity. And when you do that, manage the risk models, look at all the correlations, replace energy with those other sectors, you actually get better performance.
4. What message do you have for our provincial govenment. Which supports LNG?
They went to the cleanest spot in the energy space, which is a good thing. Our activist clients would say, Well, they’re still putting carbon in the air, and they have serious concerns about carbon. The B.C. government did go to the cleanest area, at least, but it’s still going to impact the climate longer-term.
5. What’s your forecast for 2019?
This has not been a bad year; 2019 is not going to be as good. We’re in the latter stage of the economic cycle, and usually in that period, resource-based economies and economically sensitive sectors tend to do well.
So it shouldn’t be that bad an environment for investing in Canada, if the trade war doesn’t drag everything down. We’re very pleased with the NAFTA agreement. We think Europe will probably do a deal with the U.S. next, and that the U.S. administration is trying to isolate China and put leverage on them by getting deals done with everybody else. Rates are rising and there’s going to be more volatility, but we’ve been focusing on the economically sensitive sectors into next year and watching inflation. So far, so good.