Tuesday, 9 October 2018

Climate Change...Be The Change...

The report earlier this week from the IPCC provides yet another reminder of the threats in the not too distant future from the effects of global warming. I have been following this story closely since my interest was alerted in the mid 1980s so for me, and I am sure many others, it is an issue close to my heart.

The Special Report on Global Warming of 1.5ºC was approved by the IPCC on Saturday in Incheon, Republic of Korea. It will be a key scientific input into the Katowice Climate Change Conference in Poland in December, when governments review the Paris Agreement to tackle climate change.
"With more than 6,000 scientific references cited and the dedicated contribution of thousands of expert and government reviewers worldwide, this important report testifies to the breadth and policy relevance of the IPCC," said Hoesung Lee, Chair of the IPCC.

The report is a follow-up to the Paris Agreement of 2015 where the global community agreed on action to limit global warming to a maximum of 2 ºC. This latest report calls for a lower target of 1.5 ºC.

The report says that limiting warming to the lower target will require an industrial transition unprecedented in scale - but that it is possible, if the political will is there - and that the wider opportunities and benefits are huge. It will require large-scale changes from out governments as well as individuals. We will need to invest around $2.4trillion each year - around 2.5% of global GDP for at least the coming two decades.

The report is asking for the global community to agree on 5 major steps:

  1. A reduction in CO2 levels by 45% by 2030
  2. Renewables to provide 85% of global electricity by 2050
  3. Coal to be phased out completely
  4. An area the size of Australia for energy crops
  5. Global net zero emissions by 2050

Basically the report suggests if we fail to achieve these targets we are screwed.


Since the mid 1800s the world has warmed by around 1 ºC and unless there are some drastic changes, we are heading for 1.5 ºC increase by 2050. This may not sound like much but at the end of the last ice age, the UK was covered in around 2,000 ft of glacier and the average temperature was only 6 to 8 degrees cooler than today.

Global climate change has already had observable effects on the environment. Glaciers have shrunk, ice on rivers and lakes is breaking up earlier, plant and animal ranges have shifted and trees are flowering sooner.
Effects that scientists had predicted in the past would result from global climate change are now occurring: loss of sea ice, accelerated sea level rise and longer, more intense heat waves.
Global warming = more extreme weather...droughts, storms, hurricanes, wildfires. Glaciers and polar ice caps will continue to melt which results in a rise in global sea levels which will be a threat to islands and coastal communities.
Severe droughts and/or flooding over large areas will result in a mass migration of people in affected areas which will increase political and economic stability.
In short, global warming and climate change could have far-reaching and long-lasting consequences for millions, possibly billions of people depending on the degree and speed of warming.

What Can We Do?

Of course we have known about the probable effects of climate change for at least 30 years. The IPCC was set up in 1988 by the UN and the World Meteorological Organisation, bringing together the world’s leading climate scientists to assess knowledge of climate change and provide scientific advice to policymakers.

In 2006 the UK government published the Stern Report on Climate Change, led by the former World Bank chief economist Sir Nicholas Stern, showing for the first time that the catastrophic economic impacts of climate change far outstrip the relatively modest costs of reducing emissions.

I first became aware of the problem in the mid 1980s having read 'Seeing Green' by Jonathan Porritt who was then director of Friends of the Earth. I have tried to do my bit over the years and reduce my carbon footprint. Nothing dramatic but changes to lifestyle...basic insulation around the house, cut back on meat, avoid flights/cruises abroad and take holidays in the UK (that's why I do not need a passport), an extra layer of clothing rather than turn up the heating and planting a tree or two. During my stay in Devon we held an annual tree week event and over a period of 6 years collectively planted around 10,000 trees on Dartmoor in conjunction with the Moor Trees Charity. 

We probably do not have much influence on what our government does or does not do, on the phasing out of fossil fuel power stations and the introduction of all the infrastructure to support the switch to electric transport. President Trump may pull out of the Paris Climate Agreement and there's not much we can do to change his mind. However, we can all choose what we eat, how we move around, where we take holidays and weekend breaks and generally how we live our lives. It's easy to think what one person chooses to do or not do will not make any difference but the way we act will influence the people around us and will have a knock-on effect. Small lifestyle changes taken by millions of individuals will have a significant impact on the big picture.

Avoiding meat and dairy products is the single biggest way to reduce your environmental impact on the planet, according to the scientists behind the most comprehensive analysis to date of the damage farming does to the planet.
For starters, a cow on average release between 70 and 120 kg of methane each year. Methane is a greenhouse gas like carbon dioxide (CO2). But the negative effect on the climate of methane is 23 times higher than the effect of CO2. Therefore the release of about 100 kg methane per year for each cow is equivalent to about 2,300 kg CO2 per year.

Secondly land use - without meat and dairy consumption, global farmland use could be reduced by more than 75% – an area equivalent to the US, China, European Union and Australia combined – and still feed the world. For example, beef cattle raised on deforested land result in 12 times more greenhouse gases and use 50 times more land than those grazing rich natural pasture.

Another area of concern highlighted in the report is aviation which is growing at a rapid pace due to 'cheap' flights. It currently accounts for up to 5% of all global warming emissions. Air travel has a much greater impact per passenger mile travelled compared to road or rail. Studies show that high altitude emissions which also include water vapour as well as CO2, nitrous oxides and sooty particulates from the burning of kerosene. Aviation is the fastest growing area of all contributors to global warming. Most air travellers are blissfully unaware of how their flying behaviour contributes to global warming.

Aviation, along with shipping, was given special status and excluded from the Kyoto and Paris climate change agreements. Also, under the Chicago Convention, countries are not permitted to levy fuel duties or VAT on international flights. Not that our political parties are looking to restrict cheap flights!

Hopefully our governments will take these issues more seriously but judging by the progress of the Green Party over recent years I am not holding my breath.
In the absence of governments and business grasping the nettle, it will fall to individuals to instigate some changes.

So, a few suggestions:

  • think about reducing consumption of meat or going veggie
  • look into the option of electric cars or even car share
  • walk or cycle short distances (2 miles or less)
  • think about food miles and choose local produce
  • think about second-hand clothes from charity shops rather than new
  • think about UK holidays to avoid air travel/cruises
  • put on an extra layer of clothing rather than turn up heating
  • look out for opportunities to plant a tree in your community
  • support an environmental organisation

People talk about saving the planet...to be honest, the planet really doesn't care whether we 'save' it or not because it will carry on regardless. What matters is whether we can continue with a relatively benign environment much as we have become used to over the past 10,000 years, or whether we stubbornly stick out collective heads in the sand and create a very hostile planet for out children and grandchildren.

Mahatma Gandhi famously said, "You must be the change you want to see in the world." In other words, although life changes are inevitable, we can also initiate personal change so we can rise to the challenges that we all face. It is empowering and means we take some responsibility for the changes we want to see happen without relying on other people to make the changes. It's about bringing your beliefs and lifestyle into closer alignment.

Our politicians spend much of their time sqabbling over Brexit but our climate scientists remind us all that the existential threat of the hour is global warming. The window to make the changes required becomes smaller with each passing year.

Further Research

Are you worried by climate change? What do you think our government needs to do now? What changes have you made (or intend to make) in your personal lifestyle to reduce your carbon footprint? Maybe you think the scientists have got it wrong and it's all unnecessary scaremongering? Leave a comment below.

Thursday, 27 September 2018

Woodford Patient Capital - New Purchase

I am making a little more progress with the transition of my portfolio from income to growth. Today, I have added Woodford Patient Capital trust to my portfolio as a replacement for City Merchants High Yield trust.

WPCT provides financing for early-stage businesses that seek to turn innovative new products into a commercial success. It is a unique investment trust that, as the name suggests, requires a long-term outlook.

The trust raised £800m when launched in April 2015 however it has been a bit of a rollercoaster ride for investors. There have been some significant setbacks within the portfolio to date, notably investments in Allied Minds, Circassia and Northwest Biotherapeutics. Overcoming setbacks is part and parcel of investing in early stage companies and any portfolio, whether investing in large or higher-risk smaller companies, will have winners and losers.

The bulk of the trust remains invested in ‘early-stage’ and ‘early-growth’ companies many of which are not listed on a stock market. These tend to be highly innovative companies developing new products and services that have the potential to change entire industries, many of which feature in the healthcare sector. Obviously not all of them will succeed.

However, Neil Woodford is reported as saying, in the teeth of such disappointments, that the trust has stakes in several companies that could be worth billions of dollars each in the next five years. On the basis of that potential, and assuming that the trust sticks with its original investments without taking any more punts on jam-tomorrow stocks, I think the lower share price currently makes it more attractive.
(click to enlarge)

Last week the shares received a boost from a reassessment of the value of cold fusion specialist Industrial Heat. Woodford says it funded this company 'to engage credible world-leading institutions rigorously to assess the claims of research groups in the field'. Growing interest in the business has enabled it to raise money from other investors prompting a substantial increase in its value.
Industrial Heat is now worth US$112.9mln according to Woodford's alternative fund manager Link, or a 357% rise compared to its previous valuation. That translated into an 8p uplift in the net asset value of Woodford Patient Capital Trust.
Earlier this year the trust received a valuation boost from the US stock market flotation of Autolus Therapeutics, which is currently its largest holding.
The value of its stake in Autolus jumped by 51% as a result of the IPO (initial public offering) being priced at a higher level than the current book value of its investment. In turn, that provides 3.8% uplift to the net asset value of WPCT.
This is the type of outcome which vindicates Woodford’s approach of finding businesses with ‘outstanding intellectual property’, helping them grow with financial support, and then reaping the rewards with exceptional long-term returns.
Top Holdings
The Company is invested in five companies that are valued at more than $1 bn Autolus, Purplebricks, Oxford Nanopore, Benevolent AI and Immunocore. Some of the largest holdings are related to healthcare.
The largest is Autolus which listed on Nasdaq in June and accounts for 11% of the portfolio. It has developed a therapy which extracts white blood cells, modifies them to target cancer and reinjects them. Its related therapies are currently going through stage one and two trials, but similar methods have already passed phase three trials in competitor companies, which gives Neil a high degree of confidence the treatments will be validated. The trust is retaining its holding despite the gains on flotation, hoping there is much more is to come from the stock.
Benevolent AI, a 9.5% position, uses artificial intelligence techniques to generate ideas for treatments for disease. The technology finds associations and similarities across research papers, potentially generating ideas for new drugs which human researchers might lack the perspective to find. It is also developing further uses for its technology outside of healthcare. Earlier this year the company raised $115m from new investors which valued the company at £2bn.
Oxford Nanopore, 8% of the trust, produces handheld gene sequencers. Its main customers at the moment are in the University, but it is keen to develop new markets and uses for its tech. It is not the only player in the field, but it does have advantages over its largest rival Illumina, both in the handheld nature of its product and in the more efficient way it builds a genome up from larger building blocks.


The trust also does not levy an annual management fee. However they will levy a hefty 15% performance fee when the trust can deliver on its promise of 10% annual NAV return. Woodford Investment Management has not yet taken any performance fees from the trust, and has some way to go before it does. The management’s incentives are therefore well aligned with the interests of shareholders.

The trust has around 90 holdings - split two-thirds unlisted and one-third listed. It recently reported half-year results to end June 2018 (link via Investegate)

At the time of this post, the net assets of the trust are estimated close to 100p however the share price lags behind at 85p which gives me a discount of 15% .

The purchase is speculative and no more than a punt on the talent and judgment of Neil Woodford to deliver the goods he has set out to achieve. The initial purchase is quite modest and represents less than 2% of my portfolio.

As ever, this article is merely a record of my personal investment decisions and should not be regarded as an endorsement or recommendation - always DYOR!

Tuesday, 25 September 2018

City of London - Final Results

I first purchased CTY for my personal equity plan (PEP) in 1995 - it has served me well enough over the past two decades and it represents the largest weighting in my remaining IT income portfolio (ISA and SIPP drawdown).

City have just announced 
full year results for the year to 30th June 2018 (link via Investegate). Share price total return has increased by 6.2% over the year. Once again however the performance was less than the FTSE All Share benchmark of 9.0%. The trust took a big hit from the collapse of Provident Financial. The manager however is quick to point out the outperformance over the longer period!

Dividends have increased by 6.0% from 16.7p to currently 17.7p giving a yield of 4.1%. This represents over 50 years of rising dividends - quite an achievement.

Earnings per share rose by 5.0% to 18.7p, mainly reflecting the underlying dividend growth from investments.

Ongoing charges are 0.41% and remain the lowest in the sector.

I have been reducing my exposure to UK equity over the past year or two and I have recently reviewed my strategy as I no longer require income and will focus more towards global growth.

3 Yr Performance v FGT & TMPL

I will therefore be looking to offload my CTY holdings when circumstances look favourable. I feel the time is right to put the faithful old carthorse out to grass in retirement. The fact that the trust has lagged the all share index over the past couple of years makes the decision easier!

As ever, please DYOR

Friday, 21 September 2018

Turn Back the Clock

There have been several articles about the collapse of Lehmans in September 2008 and over the past few days I have been casting my mind back to the very different life I was leading a decade ago.

Back then I was living and working as member of a community partnership based on the edge of Dartmoor in Devon. We owned a large 12 bed manor house set in its own extensive grounds - 18 acres of pasture and woodland overlooking the surrounding villages. It felt like I was living the dream life, far from the madding crowd.

Work involved hosting groups of between 10 and 20 people who would stay for a long weekend or possibly a week. The courses were mainly centred around personal development and relaxation - so, things like tai chi, yoga, meditation, massage etc.

All of my partners had various responsibilities - ground maintenance, cooking, bookings co-ordinator, plumbing and general house maintenance etc. My main responsibilities were as accounts manager...what's not to like about counting money! In addition to this we would all muck in when needed, especially at busy times when there was a same day change over between one group finishing and another arriving.

The business turnover was quite healthy, I think we were getting toward £300,000 per year but of course this was not all profit and there were all the expenses of servicing the groups and what was left over was divided 10 ways..and then there was tax and insurance...and no company pension scheme...but we enjoyed 'free' food, and use of the indoor swimming pool and sauna when the groups had left.

When the larger groups were in residence, it could be very busy starting with breakfasts at 7am and usually finishing after the evening meal, maybe 8pm. There was plenty of time for relaxation however - walks on the wide expanse of Dartmoor, usually a trek up to Pew Tor and back, or along the banks of the nearby river Tavy. I enjoy tennis and spent quite a bit of time on the courts. Then there was just taking time out in the grounds which included a large Victorian walled garden, a wildflower meadow, orchard and lots of places to curl up for the afternoon with a good book.
Pew Tor, Devon

I had been doing this for the previous 6 years since giving up on financial services for a large insurer based in the North West...far too stressful!

Over a period of time however personality tensions inevitably grew, it became more difficult trying to work with 10 partners who all had differing opinions on how the business should be run as well as tensions arising from some people doing more of the work than others, feelings of insecurity and all the usual personal politics and game playing and even infidelities...idyllic surroundings provide no escape! 

I think by the end of 2007 it was becoming clear these tensions were not going to get resolved and in the end we decided to wind things down and sell the property. This was completed by mid 2008 when we all departed with our share of the proceeds to go our separate ways.
River Tavy, Devon

Post Devon

I had grown very attached to the good life and made a few close friendships and joined the local choir. I stayed on for a few months to give myself some time to think about my next move. My roots are however up North and in early 2009 it was time to return. As it turned out, fortuitous as the grandchildren came along shortly afterwards and I am lucky now to be a mile down the road rather than 300!

I had also made a decision to not seek alternative employment and it was therefore in June 2008 that I 'retired'. Whilst the money would not stretch far in Devon, I had sufficient for a house up North and although I could never get by on cash savings due to the dire interest rates, I could get along fine with income from my investments and SIPP which was duly converted to drawdown.

The markets hit a low in Feb 2009 and some of those most affected were financials. Whilst interest rates were falling quickly, it was possible to acquire building society PIBS and bank preference shares with an annual yield of 10%. I loaded up my portfolio with a good spread of income-generating securities... PIBS from the Coventry, Nationwide and Skipton as well as some Lloyds Bank prefs. I also picked up a few investment trusts such as Edinburgh, City of London and Murray Income as well as some higher yielding shares such as Shell Oil, BHP Billiton, Scottish & Southern all of which helped to generate the income I needed on a regular basis.

So, an interesting and colourful chapter in my life. If I had my time over, would I repeat the experience? Yes, I'd like to think so.

What were you doing a decade back? Feel free to share some memories in the comments below.