Ocean Investing Goes Mainstream-ish, Or Mainstream-er.
KraneShares Rockefeller Ocean Engagement ETF (KSEA) Hits The Ticker
I’ve written before questioning headlines claiming the mainstreamness of ocean investing. In particular, there is a gap between access to investment opportunities for retail and American investors relative to venture and European-focused funds.
So it was with some (tentative) excitement I came across the announcement by ETF company KraneShares that they have launched a blue economy-focused ETF in partnership with sub-advisor Rockefeller Asset Management.
+KraneShares and Rockefeller Asset Management Launch Ocean Engagement ETF (KSEA), Expanding Innovative Climate Investment Lineup - KraneShares
I say “tentative” because launching a new ETF is hard. Attracting enough assets to make it a viable product in a world flooded with options is no easy task.
Also, I’ve been repeatedly disappointed by thematic ETFs that don’t stick to the theme. Fund managers are measured against benchmarks and understandably feel the pressure to at least match an index. When the SP500 runs higher on the heels of gains in a few large tech or oil companies, a thematic fund, dubbed the dreaded “underperformer,” can be left behind.
This benchmarking can lead to a common occurrence when you look under the hood of many thematic or ESG funds. You often find the same top holdings as everyone else - Apple, Alphabet, Microsoft, Amazon.
Case in point, the Newday Ocean Health ETF (ticker: AHOY) is another ocean-themed ETF. It has only $2mm in AUM and trades thinly (today 1,200 shares, yesterday 16).
But even if it were more liquid, the top holdings? Apple, Alphabet, Microsoft, Amazon…
This lack of liquidity makes it pretty hard to invest. Plus, most investors are already exposed to these companies through other funds.
To be fair, while the AHOY ETF hasn’t been a rousing success, Newday isn’t really an ETF-focused business. Newday manages over $100 million in assets through its other impact portfolios. Their primary business is advising institutional clients who want to invest in themes related to SDGs. They are a very interesting company that’s making an impact in this space.
I’m just pointing out that the ETF business is a tough one.
The reality is that distribution and marketing are just as important as the theme in attracting assets, if not more so. At the end of the day, while Newday isn’t an ETF company, KraneShares is.
About KraneShares
Managing ETFs is the main business of KraneShares. They describe themselves as a company that:
“provides investors access to China, Climate, and Uncorrelated Assets through differentiated, high-conviction investment strategies.”
They currently list 33 different ETFs on their website with cumulative assets over $8 billion.
The KraneShares CSI China Internet ETF (ticker: KWEB) holds about $5.5 billion of that total, and the Quadratic Interest Rate Volatility and Inflation Hedge ETF (phew, mouthful) (ticker: IVOL) about another billion.
The diversity of products certainly helps KraneShares spread out the expense of keeping their more niche products with lower AUM alive.
Choosing to partner with Rockefeller Asset Management (RAM) as sub-advisor to the ETF stood out due to Rockefeller’s similar role with the Credit Suisse Rockefeller Ocean Engagement Fund ($400mm AUM, not available to US investors).
I’m not sure how recent events with Credit Suisse, now UBS, are impacting these types of partnerships. But the timing of this new fund partnership might not be just a coincidence.
Rockefeller’s Track Record in Sustainability and Oceans
While the ocean investment theme is beginning to grab some headlines (as long as you have your Google Alerts finely honed), it isn’t new to Rockefeller. Looking into their history, it’s clear that they have a strong commitment to the theme and are a sought-after partner and advisor.
Rockefeller and The Ocean Foundation
Rockefeller’s collaboration with The Ocean Foundation dates back to 2011 when they developed the Rockefeller Ocean Strategy.
This collaboration resulted in a closed investment fund (from what I understand) that operated for nine years before being converted to a mutual fund, the Climate Solutions Fund (ticker: RKCAX).
The Climate Solutions Fund was launched in 2021 and currently has about $78mm in AUM.
A 2020 press release highlighting Credit Suisse’s process in choosing RAM as a partner for the launched CS Rockefeller Ocean Engagement Fund was insightful.
+Credit Suisse launches ocean engagement fund with Rockefeller AM - CityWire
Credit Suisse held a competitive pitch to win the sub-advisor role, with 30 candidates accepting the challenge.
“We’ve done this kind of process before, but what was amazing this time is that Rockefeller was the clear and unanimous winner. We were extremely impressed with the quality and seriousness of the proposal and their commitment to partner with Credit Suisse and others to make this solution a success and create a positive impact on oceans.”
The release also noted that:
“Rockefeller asset management has a great track record as a stock picker and as an engagement specialist, which was very important for us. They also have very strong associations with other influential organizations, for example the Ocean Foundation, which provides added value.”
Part of the role of these funds is to bring companies up the curve of sustainability. As the fund prospectus notes, these so-called “Ocean Improvers” are companies with a neutral to negative effect on our oceans but are open to taking the steps necessary to improve. (More on the perspective below).
It’s all too easy to divest our portfolios of dirty companies and call ourselves “green”. The real work is to roll up our sleeves and instigate positive change in these large companies that have such a large impact on the planet.
Rockefeller has experience doing this, so I’m interested to see how it goes.
To get an idea on how Rockefeller has been engaged in the blue economy theme, take a look at these thought leadership pieces. They include a report outlining their long-term engagement with Waste Management (currently the largest holding in KSEA):
+Climate Change: The Mega Trend Reshaping Economies and Markets
+Crucial Considerations When Engaging Corporates on Seafood Traceability
+Constructive Engagement Series: Waste Management Inc
+RCM - 2022 Sustainable Investing Annual Report
What’s Inside KSEA?
Looking at the KSEA prospectus and holdings, you can see the influence of the sub-advisor team at Rockefeller.
From the Prospectus:
The Fund will invest in three categories of Ocean Related Companies:
(1) Ocean Leaders: companies that the Sub-Adviser has determined currently pursue strong ocean sustainability practices;
(2) Ocean Solutions: companies whose products and services seek to address sustainable ocean impacts; and
(3) Ocean Improvers: companies whose activities are currently having a negative to neutral impact on oceans or ocean resources but who are taking, or have formally expressed to the Sub-Adviser they are considering taking, material steps towards enhancing sustainability initiatives and reducing the impact that their products or services have on oceans or ocean resources over time, in conjunction with the Sub-Adviser’s preliminary engagement objectives. The Fund anticipates that a majority of the Fund’s assets will be invested in Ocean Improvers (emphasis mine).
KSEA Holdings Target SDG 14.1 - Ocean Pollution
Top 10 KSEA Holdings (aside from cash):
Waste Management (waste / recycling)
Berry Global (plastic / packaging)
Advanced Drainage (water management)
Albertsons Companies (food / grocery)
Loblaw Companies (food / grocery)
SSE PLC (renewable power)
Crown Holdings (packaging)
Subsea 7 (energy / offshore engineering)
Compagnie de Saint Gobain (materials)
There is a substantial similarity with the top holdings of the CS Ocean Engagement Fund. In fact, 9 of the top 10 holdings are the same as the CS Ocean Engagement Fund.
If I had to generalize the top holdings of KSEA, I would point out the focus on plastic and packaging.
I’ll admit my dive into oceans has been more focused on energy, seafood, shipping, and tourism. But the focus on a circular economy and reducing ocean pollution certainly fits the theme.
Looking at the UN SDG 14 - Life Below Water, you’ll come across this subsection:
“Target 14.1: By 2025, prevent and significantly reduce marine pollution of all kinds, in particular from land-based activities, including marine debris and nutrient pollution.”
Looking at the top fund holdings, I’d say the Rockefeller team sees an opportunity for both profit and impact in addressing SDG Target 14.1. Of course, looking beyond these top 10 positions, you’ll find a global mix of investments in everything from energy to shipping to seafood.
Cautious Optimism for KSEA
Honestly, it would have been encouraging to see this ETF launched with more than just $2.5 million AUM (especially considering Rockefeller Capital Management manages about $100 billion).
While I am optimistic that there is an elevated chance of success marketing this fund, considering the partnership involved, it still falls into the category of niche products that characterizes the ocean investing theme.
But both the history and expertise of corporate engagement by the Rockefeller team and the actual makeup of the portfolio lead me to believe this could be a thematic ETF that actually sticks to the theme.
That expertise, combined with the marketing capabilities of KraneShares, is grounds for some optimism.
There’s a lot of room for impact with these so-called “Ocean Improvers,” and I applaud the strategy of taking on that form of investor activism.
I’m also encouraged to see another product that the average investor who is interested in the ocean economy can get behind, even if we aren’t mainstream quite yet.
Mark Your Calendar
KraneShares will be hosting a webinar on the strategy behind KSEA on October 4. Be sure to register here.
Superorganism - Very cool venture investment fund announcement this week around the theme of biodiversity. Article on Bloomberg by the excellent Todd Woody.