For over a decade, the investment case for resource efficiency has been clear: companies that make better use of energy, water, and waste tend to be more resilient and should, according to our models and in line with conventional wisdom, deliver stronger financial performance over time. That fundamental notion remains unchanged. However, recent shifts in policy and market sentiment have created headwinds that have impacted the performance of our investment strategies.
The return of the Trump administration has introduced renewed regulatory challenges for environmental and sustainability-focused investments. Policy shifts may lead to changes in disclosure requirements and industry regulations, creating near-term uncertainty. However, the broader trend toward efficiency, sustainability, and responsible resource management remains a powerful force shaping market dynamics.
Politics is inherently transitory, but climate change is not. Record-breaking global temperatures have continued to reinforce the urgency of sustainable investing, with 2024 being the hottest year on record. Just months ago, the devastating Los Angeles wildfires provided another stark reminder of the mounting financial and human costs of environmental inaction. Companies that prioritise efficiency and sustainability are not just aligning with regulatory trends—they are positioning themselves for long-term resilience in a world where resource scarcity and environmental impact are becoming central economic factors.
We are not immune to changing market conditions. Recent headwinds have resulted in a period of underperformance for our investment approach. However, as long-term investors, we must differentiate between cyclical shifts and structural trends. The drivers of Resource Efficiency remain intact, and the long-term outlook for this investment approach is as strong as ever.
Strategy Performance
The market has undergone significant shifts, beginning with a “junk rally” driven by volatile and low-quality companies, and followed by a strong momentum rally in large-cap stocks fueled by AI and related trends. This momentum extended into adjacent sectors, notably electricity producers, where fossil fuel and nuclear power generation outperformed renewable energy companies. The latter faced additional pressure, amid the US election cycle and policy narratives surrounding the Trump administration, leading to further underperformance. These developments, alongside the dominance of large-cap stocks, have resulted in heightened market concentration. The number of MSCI index constituents has dropped to levels not seen since the early 2000s, reinforcing the challenge for fundamentally strong companies, down the market cap scale, to gain attention in the current environment.
Despite these headwinds, our investment case for Resource Efficiency remains unchanged. Our factor identifies well-managed companies that are profitable, cash-flow-rich, and under-levered—characteristics that have been overlooked in the recent speculative environment but remain crucial for long-term resilience. Additionally, our approach focuses on companies that consistently outperform analyst expectations and provide stronger guidance revisions than their less efficient peers. However, in a market where price-earnings ratios soar into the high hundreds and stocks like Palantir and Coinbase rally by several hundred percent, solid and fundamentally sound businesses may struggle to attract short-term investor interest.
Institutional Investors Maintain Commitment and Capital Inflows Remain Strong
Major asset owners – including pension funds, insurers, and sovereign wealth funds – operate on multi-decade horizons. Many have formalised net-zero commitments extending to 2040 and beyond, reflecting their awareness of the financial risks associated with climate change and inefficient resource use.
Despite recent performance challenges, our strategies and institutional mandates continue to attract investment and industry recognition. This reflects investors’ belief in the long-term merits of our approach and the resilience of Resource Efficiency as an investment factor. Osmosis has seen continued flows into both strategies and segregated accounts, bringing our assets under management above $18 billion (as at 6 February 2025).
Osmosis: A Strategy Built for the Long Term
Osmosis was founded on the principle that Resource Efficiency is a financially material investment factor. That has not changed. While recent market conditions have presented challenges, our conviction remains firm.
Market cycles fluctuate, and political priorities shift. But over time, capital gravitates towards efficiency and away from waste. This is not a question of ideology but of sound financial decision-making.
We are in a period of transition, and with that comes short-term volatility. However, the fundamentals behind environmental investing remain robust. As a firm, we remain committed to our data-driven approach, confident that, in the long run, efficiency will continue to be rewarded.
Thank you for your continued trust and partnership. Please feel free to reach out with any questions or concerns.
Sincerely,
Ben