Energy Transition Long-Short Strategy

Transcription

1 Energy Transition Long-Short Strategy Methodology Guide

2 Table of Contents 1. Strategy Overview and Description Membership Criteria Long Component Universe Short Component Universe Constituent Grading Long Component Short Component Reconstitution and Rebalancing P age

3 1. Strategy Overview and Description The Energy Transition Long-Short Equity Strategy is a rules-based alternative index strategy designed to benchmark and capture the potential upside of a transition to a low-carbon economy. Long companies are selected from the Clean Edge universe of clean energy, advanced transportation, and smart grid and grid infrastructure companies using fundamental quality factors. The short components are selected from FFI's Carbon Underground 200 (CU200), a list of global publicly traded companies ranked by potential CO₂ emissions embedded in their reported oil, gas, and coal reserves. Short positions are selected and weighted based on a combination of fundamental and carbon-related factors that indicate the degree to which fossil fuel companies are exposed to stranded-asset risk. The strategy contains 40 long constituents and 20 short constituents, selected and weighted by their grade. The long and short portfolios are adjusted dynamically based on: 1. A quantitative rules-based market indicator which scores growth and value market signals. 2. A momentum indicator that compares the long and short portfolio momentums. Depending on the quantitative & momentum indicators, the net exposure of the strategy ranges from 40% to 100% with the short position comprising either 20% or 30% of the total strategy. During times when the market indicator shows attractive readings on valuation and growth and the momentum indicator is in favor of the long components the strategy shall have 100% net exposure. During times when the market indicator shows unattractive readings on valuation and growth characteristics and the momentum indicator is in favor of the short components the strategy shall have 40% net exposure. The Strategy is reconstituted every 6 months (see below) and rebalanced each calendar quarter. 3 P age

4 2. Membership Criteria 2.1 Long Component Universe Strategy eligibility is limited to specific security types only. The security types eligible for the strategy include common stocks, ordinary shares, and depository receipts (American and global). To be eligible for inclusion issuers of the security must be classified, according to Clean Edge, Inc., as technology manufacturers, developers, distributors, installers, and/or system integrators in one of the following sub-sectors: Advanced Materials (nanotech, membranes, silicon, lithium, carbon capture and utilization, and other materials and processes that enable clean-energy technologies); Energy Intelligence (smart buildings, energy conservation, automated meter reading, energy management systems, smart grid, power controls, etc.); Energy Storage & Conversion (advanced batteries, hybrid drivetrains, all electric vehicles, fuel cells for stationary, portable, and transportation applications, etc.); Renewable Electricity Generation (solar photovoltaics, wind power, geothermal, etc.) Grid Infrastructure (electric infrastructure, superconductors, EV networks, autonomous and connected mobility, software, and/or other grid related activities); In addition, a security must meet the following: be listed on an index-eligible global stock exchange*; have a minimum market capitalization of $75 million; have a minimum three-month average daily dollar trading volume of $ 1 million; have a minimum closing price of $1.00; have seasoned for at least three months on an index-eligible global exchange; the issuer of the security may not have entered into a definitive agreement or other arrangement which would likely result in the security no longer being index eligible; may not be issued by an issuer currently in bankruptcy proceedings; may not be placed in a trading halt for two or more consecutive weeks; and the issuer of the security may not have annual financial statements with an audit opinion that is currently withdrawn. 4 P age

5 2.2 Short Component Universe Strategy eligibility is limited to specific security types only. The security types eligible for the strategy include common stocks, ordinary shares, and depository receipts (American and global). To be eligible for inclusion the security must be part of the FFI Carbon Underground 200 (CU200) list. The CU200 ranks the top 100 coal and top 100 oil and gas reserve owners based on the potential emissions in reported reserves. In addition, a security must meet the following: be listed on an index-eligible developed market global stock exchange*; have a minimum market capitalization of $1 billion; have at least 50% free-float; have a minimum average daily trading volume of $ 1 million; have a minimum closing price of $1.00; have seasoned for at least three months on an index-eligible global exchange; the issuer of the security may not have entered into a definitive agreement or other arrangement which would likely result in the security no longer being index eligible; may not be issued by an issuer currently in bankruptcy proceedings; may not be placed in a trading halt for two or more consecutive weeks; and the issuer of the security may not have annual financial statements with an audit opinion that is currently withdrawn. *Index-Eligible Global Stock Exchanges Global stock exchanges are reviewed periodically for eligibility. In general, a global exchange will be deemed ineligible if securities cannot be readily obtained either due to foreign investment restrictions or otherwise. 5 P age

6 3. Constituent Grading 3.1 Long Component The Long Component Universe is graded using a fundamental multi-factor model where each attribute is normalized to a relative grade between using the following percentiles: 5%, 95% and all attribute grades are combined to a weighted grade for each constituent. The resulting grade will be used in selection and weighting of the constituent when constructing the long portfolio of the strategy. 3.2 Short Component The Short Component Universe is graded using: A fundamental multi-factor model where each attribute is normalized to a relative grade between using the following percentiles: 5%, 95% (same model as long component); Carbon scores. 1 All attribute grades are combined to a weighted grade for each constituent. The resulting grade will be used in selection and weighting of the constituent when constructing the short portfolio of the strategy. 1 Carbon scores are based on: Reserves intensity (a calculation that divides potential CO2 emissions embedded in reserves by the total sales of a company); Reserve type (which weights the type of reserve based on use and carbon intensity): o Emissions from thermal vs. metallurgical coal; Business models of oil & gas companies: o Percentage of total revenue from upstream activities; o Average production costs; o Exposure to unneeded oil & gas upstream capital expenditures in a 2 Celsius scenario (IEA s Sustainable Development Scenario) derived by the Carbon Tracker Initiative (see o Potential emissions derived from tar sands reserves. 6 P age

7 4. Reconstitution and Rebalancing Reconstitution occurs every 6 months at the end of March and September. When reconstituting the strategy, the long and short universes are graded according to the grading rules described above. The top 40 stocks from the long component and the bottom 20 stocks from the short component are selected. Within each component, the stocks are weighted by their grade. Every calendar quarter, the exposure is determined based on the market and momentum indicators and the weights of the constituents are rebalanced accordingly. 7 P age