ENTELLIGENT S SMART CLIMATE PORTFOLIO OPTIMIZER Smart Climate Data Solutions

Transcription

1 ENTELLIGENT S SMART CLIMATE PORTFOLIO OPTIMIZER Smart Climate Data Solutions Entelligent support@entelligent.com

2 Disclaimer This confidential document is only intended for the recipient to evaluate its interest in the Smart Climate Portfolio Optimizer or in a potential investment in BDC II, LLC dba Entelligent (Entelligent). It may not be redistributed or used for any other purpose without the prior written consent of BDC II, LLC dba Entelligent (Entelligent). Entelligent is not a tax, legal, insurance or investment advisor. Nothing contained in this document or in outputs from the Smart Climate Portfolio Optimizer constitute a recommendation for any individual stock, portfolio of stocks, transaction or investment strategy that is suitable for any specific person. You alone are responsible for your own investment decisions and acknowledge that the Smart Climate Portfolio Optimizer is intended to provide information, not investment advice. This document is provided for informational purposes only and does not constitute an offer to sell or a solicitation to buy an interest in Entelligent or any other security. You understand that an investment in Entelligent or any security is subject to a number of risks and that this document will not identify or describe risks or other relevant information needed to make an investment decision. Any offer to sell or solicitation to invest in Entelligent will be made only by an appropriate subscription agreement and related documents. This document contains statements about Entelligent and the Smart Climate Portfolio Optimizer that are based on our current beliefs and assumptions and on information available as of September 28, 2016 that we believe to be reasonable. 2

3 The Smart Climate Portfolio Optimizer Created by Entelligent The Smart Climate TM Portfolio Optimizer (the Optimizer ) is a new and exciting tool for investors and portfolio managers (users). This big data solution provides information and actionable knowledge using our proprietary value driven analytics, which are designed to help users hedge risks due to socio- economic and policy shocks, customize client- based ESG strategies, and provide financial forecasts in one package. The Optimizer provides data and analytics that can help users to identify both opportunities and risks associated with the efforts of companies and investors to address the threats from climate change. The Optimizer can also help users capture the impact of socio- economic and energy supply trends related to climate change. By calculating potential profitability of key energy sources within our global economy, this tool can forecast market performance of the key subsectors and individual companies in the investible universe. The Smart Climate Portfolio Optimizer created by Entelligent assists users in rebalancing their portfolios. Investors use their assessments of future policy and environmental scenarios to take advantage of market fluctuations and restructuring events that result from a changing environmental and regulatory landscape. Entelligent s Optimizer then integrates the portfolio with a forward- looking ESG scoring methodology to align the user s portfolio with their investment values. Entelligent s Optimizer seeks to improve on current portfolio optimization methods by hedging against socio- economic policy shocks while integrating certain financial goals and investment values. 3

4 Methodology Entelligent collects data on more than 15,000 companies listed across seven of the world s largest stock exchanges. These include the New York Stock Exchange (NYSE), NASDAQ, the Toronto Stock Exchange (TSX), the Toronto Stock Exchange Venture (TSX- V), the London Stock Exchange (LSE), the Stock Exchange of Hong Kong (SEHK), and the Australian Securities Exchange (ASX). Entelligent s proprietary tool integrates value driven risk analytics and dependency on the energy industry (the E- Score TM ) with financial performance data on companies in the investment universe. 1. Smart Climate Value Driven Analytics Entelligent has built a scenario rich database using inputs from a proprietary systems dynamics climate and energy model (hereto referred to as the model ). Given a future scenario, the model simulates future price and demand for nine energy sources. Using this data, Entellingent employs a post processor to the model to calculate profitability indicators for investments related to each energy source. The energy sources are oil, gas, coal, biofuels, renewable fuel, and renewable electric, hydro, new tech, and nuclear. The profitability estimation is based on a system of difference equations coupled with the model equations. These profitability simulations are used to generate financial time series values such as net present value (NPV), return on investment (ROI), debt coverage ratio (DCR), and internal rate of return (IRR) for all nine energy sources. 4

5 Entelligent carefully selects companies corresponding to these nine energy sources and classifies them into nine independent energy categories. Then, the financial time series estimates are used as explanatory variables to estimate the market capitalization of the nine energy categories. Macro- Economic Indicators GDP Population Etc. Climate Change Indicators Temp. Sea level Etc. Policy Indicators Carbon Price Subsidies Etc. Energy Demand & Price Total Revenue of Energy Sources Total Cost of Investment in Energy Sources Time Series Estimates of Energy Categories (NPV, IRR, ROI, DCR) The Smart Climate Optimizer next step is to estimate the performance of 148 industry subsectors as defined by Morningstar s global equity classifications using estimated performance of the nine energy categories as explanatory variables. The underlying assumption of this step is that energy- dependent industry subsectors are affected by the variability in the nine energy categories. The examples below show scenario- based simulations of three selected sectors price return performance. 5

6 Smart Climate Energy Category Predictions Energy Category : Oil Smart Climate Energy Category Predictions Energy Category : Coal Returns Quarter Returns Quarter 95% CI Expected Mean Returns (Voltality Adjusted) Predicted Returns Scenario BAU Predicted Returns Scenario 1 Predicted Returns Scenario 2 Predicted Returns Scenario 3 Predicted Returns Scenario 4 Predicted Returns Scenario 4 95% CI Expected Mean Returns (Voltality Adjusted) Predicted Returns Scenario BAU Predicted Returns Scenario 1 Predicted Returns Scenario 2 Predicted Returns Scenario 3 Predicted Returns Scenario 4 Predicted Returns Scenario 5 Returns Smart Climate Industry Performance Predictions Industry : Aerospace & Defense quarter 95% CI Expected Mean Returns (Voltality Adjusted) Predicted Returns Scenario BAU Predicted Returns Scenario 1 Predicted Returns Scenario 2 Predicted Returns Scenario 3 Predicted Returns Scenario 4 Predicted Returns Scenario 5 Note: Under Scenario 1, the forecasted returns of coal show positive returns; however, oil and aerospace show a steep fall. Entelligent s Smart Climate analytics are designed to capture socio- economic and policy signal through scenario analysis to help investor s hedge risk. The Smart Climate Portfolio Optimizer has the capacity to measure the sensitivity of sectors/companies to each socio- economic scenario. Scenario Initial GDP per capita rate global Interest rate Increase in rate of EII improvement Carbon tax initial target Source subsidy all delivered fuels BAU High High Medium Low Low Low S1 Low Low Low Low Low Low S2 High High High Low High Low S3 High Low Low Low Low Low S4 High Low High Low Low High S5 Low High High High Low High Source subsidy renewable The final step of the Smart Climate Optimizer makes company level value predictions based on comparative positioning in terms of size, growth, and volatility (Z- scores) in the industry subsector. We then use this company level data to score companies based on their value predictions. For estimating the volatility of company returns, the model uses Monte- Carlo simulations to test sensitivity to changes in scenarios of the most correlated energy categories. 6

7 Systems dynamics model & Entelligent financial calculator Time series estimates of energy sources (NPV, IRR, ROI, DCR) Energy source analysis and forecast 148 Morningstar subsector analysis and forecast Company level analysis and forecast 2. The Entelligent E- Score TM Entelligent has developed a forward looking scoring methodology that ranks companies on their exposure to the energy industry and climate change using environmental, social, and governance (ESG) metrics. The E- score integrates information from regulatory reports (SEC 10- Ks and 10- Qs), company disclosures through press releases, Corporate Sustainability Reports, industry specific information such as Integrated Resource Plans filed by electric utilities, analyst reports, and other commercial and non- profit sources of information. This integrated database captures companies present posture and future commitment to improve their operations for climate change risks and opportunities. Entelligent s E- Score aims to index company s commitment and competence in dealing with climate change risk and energy industry dependency. The E- Score is not just a metric of present activities, as it rates companies on their commitment to making long and short term operational changes. The application of the E- Score becomes stochastically relevant as these metrics can be used to evaluate a company s efforts to boost performance and mitigate risk by lowering their environmental footprint and dependency on the energy industry. Entelligent s tool is unique in its application of ESG data for risk mitigation and value creation. The Smart Climate Optimizer is built on the principle that in order for ESG data to be actionable it must be subsector focused where variance is isolated between simulations based on different socio- economic inputs. This E- Score classifies companies into four categories; Innovators, Leaders, Followers and Laggards for each subsector. The companies with the highest ratings are classified as Innovators and the companies with lowest ratings are classified as Laggards. The Leaders and Followers are in between. This rating system helps investors to align their portfolios with their values without sacrificing diversification and performance. 7

8 Conclusion By identifying company and industry exposures to the risks and opportunities presented by the evolving conditions in global energy markets, the Smart Climate Portfolio Optimizer can assist in evaluating portfolio performance. Such risks and opportunities are identified by measuring the variance of individual sub- sectors of the investible universe under a multitude of competing scenarios that adjust for key variables (such as energy policy, environmental constraints, rate of market innovation and capital efficiency). We can then suggest portfolio modifications to improve E- scores, to better manage portfolio risk and to exploit opportunities for improved return per unit of risk. The Smart Climate Portfolio Optimizer can also be used to build portfolios benchmarked against any major index, such as the S&P 500, Dow Jones Industrial Average, and ACWI. Entelligent s Smart Climate Portfolio Optimizer can provide rebalancing and weighting adjustments to these broad indices as investors review and hedge the risks associated with rising energy costs, increased regulation and changing patterns of energy use. The Optimizer is a powerful solution for big data driven management and provides a new technology that offers stochastically relevant ESG integration into public security investment portfolios. 8