A clean-energy theme inside the oil-and-energy regime

The theme was already a market

Renewable-energy investment was already described at US$100 billion in 2006, with the industry then growing at 20% to 30% a year.

Listed renewable-energy products were treated as positively linked to oil because higher oil prices were said to improve the relative economics of substitute fuels.

Policy inputs in the case included a US$150 billion ten-year climate-energy program, a US$50 billion strategic energy fund, and a European target to take 20% of energy from alternatives by 2020.

Place the idea in the energy-regime

Intermarket-analysis means reading oil, conventional energy equities, and clean-energy baskets together so one theme is placed in a weeks-to-months market regime rather than treated as a stand-alone story.

The energy-regime is the joint state of oil prices, conventional energy equities, and policy support that decides whether a clean-energy theme behaves as a hedge or as more energy exposure. The archive already treated listed products as moving with oil when substitute-fuel economics improved.

Editorial: those policy figures are regime inputs, not a reason to assign size. The first portfolio question is whether the oil link means the thematic-basket lives inside the same energy-regime as a conventional energy sleeve.

What the thematic-baskets held

Session-tradable exchange baskets were presented as a way to hold a diversified index slice of the theme, with ongoing expenses described as typically lower than those of index mutual funds. A thematic-basket is an exchange-listed collection of index constituents used to hold a clean-energy or transitional-energy idea instead of a single company.

A July 2007 London-listed clean-energy basket held 30 large listed companies, about 35% in generation and 65% in equipment and technology.

A May 2007 US-listed alternative-energy basket tracked a 30-name extra-liquid subset of an 88-name global composite and required more than 50% of revenue from alternative energy, rescreening more than 250 candidates every six months. That revenue-screen is an index rule that keeps only companies earning more than half of sales from alternative energy.

Several US theme funds were described as keeping at least 80% or 90% of assets in their published indexes, whose constituent counts were given as about 42, 47, and 84 names depending on the benchmark.

Editorial: construction rules describe the mix and the purity of the slice. They do not answer whether the slice is a new risk or a second energy bet.

Check for a duplicate energy sleeve

A February-to-October 2007 window was used to show alternative-energy baskets moving in close step with a traditional-energy sector fund, so the theme was treated as highly correlated with an existing energy sleeve.

Correlation-analysis checks whether listed clean-energy baskets move with a traditional energy sleeve closely enough that the theme is a duplicate energy risk, not a diversifier.

Editorial: when baskets already move in close step with a traditional-energy sector fund, adding a thematic-basket does not introduce a separate risk. It adds another expression of the same energy-regime.

Screen liquidity before size

Most of the then-new theme baskets were flagged for low volume and potentially wide spreads. Only the March 2005 clean-energy listing was singled out as having good liquidity.

A liquidity-filter screens theme vehicles by volume and spread so only an executable basket survives before any portfolio weight is assigned.

Editorial: an illiquid vehicle should not receive a weight that the theme itself cannot justify. The archive singled out one listing as liquid. The others do not pass the filter on volume and spread.