According to the U.S. Drought Monitor, California’s dismal state of affairs shot up from 28% to 63% in January 2014.  There was a brief period of precipitation in February, but not near enough to remedy the dangerously low water shortage.

This drew our attention to Motif Investing’s WATER SHORTAGE Portfolio for a more in-depth analysis of investment prospects.

Though the focus is on the growing global demand for fresh water and rebuilding the delivery system, the shutting down of California’s central valley agricultural region this year punctuates its validity.

Comparing the “Ridiculously Resilient Ridge” a term coined by Ph. D. candidate at Stanford University Daniel Swain on his blog weatherwest.com, that defines the high pressure jet stream shift due to the Arctic Circles volatile temperature changes; current global climate anomalies will create innovative techno-industrial solutions.

Comparatively basing this motif’s time horizon for profitability on public sentiment, if the global jet streams continue to perform out of sync, we’re looking to invest in solutions, not liabilities.

We consider “WATER SHORTAGE” a growth-centered strategy, identifying companies poised to expand revenue gained by resolving the global water crisis.  We started tracking WATER SHORTAGE on February 27, 2014.

We have seen a +1.17% profit since.  On March 7, 2014, the portfolio closed with a +0.39% uptick, compared to market performance declines dominated advances at the close.  This reflects a “robust” economic moat, minimizing negation of gains. Exactly what we’re looking for to bolster our gains.

WATER SHORTAGE PERFORMANCE STATS

Motif Investing inception date was May 6, 2012 and updated (rebalanced) on January 15, 2014.  The Motif Index is 1659  +0.60%; 1 Year Return +30.7%.  The basket is an allocation of equities focused on principal water activities and includes dividend yield at 1.3% yearly.

The sectors and assets are: Water Infrastructure – XYL, FELE, GRC, RXN, NEX, LAYN, NWPX; Water Treatment – PNR, VE, ECL, CCC; Water Technology – ROP, WTS, BMI, AEGN, ESE; Irrigation Systems – LNN, VMI; and Desalination – CWCO, ERRI.

OUR ANALYSIS

(PARAMETERS: 30 DAY HORIZON; CONFIDENCE INTERVAL IS 95% [Value at Risk]; DAILY RISK FREE RATE IS 0.01%; BENCHMARK IS S&P 500)

Expected Return is 0.15% on a daily basis with usual market performance.  Volatility (standard deviation) is 1.03%.  The standard deviation of returns is 0.37 and is 1.54 times less volatile than the S&P 500. (This quantifies the robust factor that we are looking for overall.)

The Alpha is 0.46; Beta 0.33 and Sigma (Risk) is 0.37 with a Value at Risk 21.97

Based on this data, WATER SHORTAGE’s “pure-play” factor and market capitalization “small to large cap” adjusted to Motif’s weight index constitutes a better than average probability of profit in the coming months.

Mean-variance optimization of WATER SHORTAGE shows a Relative Performance Gain of 11.39%.  The Sharpe Ratio comparatively is 10.96% more efficient.

Asset Allocation Adjustment:  We suggest increasing share allocation on the following assets: FELE, ESE, BMI, RXN, ROP, and decrease asset allocations on the others.  This will increase returns from 2.84% to 3.32%.

GRTS PORTFOLIO ANALYSIS – AG DROUGHT PORTFOLIO

We built a similar portfolio addressing the drought issue, but it is more focused on commodities’  ETFs.  The efficiency is 1.02% (Water Shortage 1.03%) and both have a Grade of 55 on the Relative Efficient Frontier.

Since its inception, February 26, 2014, AG DROUGHT has yielded 5.35% compared to Water Shortage’s 1.17%.

AG DROIUGHT ETFs: SGG, BAL, JJA, JO, CORN, DBA, FUD, RJA

NEXT: WATER SHORTAGE AND AG DROUGHT – THE HYBRID PORTFOLIO

Resources: Macroaxis;  Motif Investing; weatherwest.com

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