Wednesday, 13 February 2019

My Global Index Funds Under the Spotlight

Conventional investing wisdom of recent years suggests holding a broadly diversified, low cost global index fund or ETF is the way to go. This article on the Monevator site by Lars Kroijer is very good and certainly helped to persuade me of the merits of adopting a simple strategy based on a global index fund combined with a solid bond fund.

Since this article was published in 2015 and later reading Lars book 'Investing Demystified' as well as Hale's 'Smarter Investing', my investing strategy has evolved to incorporate low cost, globally diverse multi-asset index funds. My core holdings include Vanguard Lifestrategy and HSBC Global Strategy which together make up around 45% of my total portfolio.

I am now starting to take a closer look at this strategy as I learn more about the threats posed by climate change.

The Conflict

The world is changing and climate change is rightly moving to the top of the political agenda. In the US, public opinion is shifting and the Democrats want to put a Green New Deal at the heart of their election campaign in 2020. This is an ambitious plan to transform the US towards net zero carbon emissions over just 10 years. Large fund managers are pushing big firms to reduce their carbon impact to comply with the 2015 Paris agreement. Even Warren Buffett has staked $30bn on clean energy.

As the world changes, our priorities change and my approach to investing needs to reflect these changes. Oil and gas are fossil fuels which have been the driver of the global economy for the past century but in the process we now find that it has been a big factor in global warming. For much of the 20th century, just five big oil companies - Exxon Mobil, Chevron, Shell, TOTAL and BP - have been responsible for up to 20% of global oil and gas production although their dominance is beginning to fade.

These oil majors are gearing up to expand production and will always lobby hard via their trade associations to block attempts to limit global CO2 emissions. However, the IPCC say oil and gas production needs to fall by around 20% by 2030 and by around 55% by 2050.

In the UK, capacity for renewable energy has trippled in the past 5 years and in 2018, it overtook fossil fuel for the first time.

The climate science is convincing. We need to limit global temperatures to 1.5C above pre-industrial levels to avoid some very unpleasant consequences. One way to do this would be to quickly reduce our dependence on fossil fuels and move to clean energy such as wind and solar.

In 2016, Morgan Stanley warned investors that long term investment in fossil fuels could turn out to be a poor decision "Investors cannot assume economic growth will continue to rely heavily on an energy sector powered predominantly by fossil fuels". Their latest report on this subject from last October is worth a read.

Just last week, California's largest energy supplier PG&E filed for bankruptcy due to global warming. It could no longer afford the insurance liability costs arising from wildfires which have increased in frequency and duration due to the warmer, drier conditions of recent years. This has caused alarm bells to ring in many boardrooms around the US as they assess the economic costs and liabilities arising from the changing climate.

The California state pension arrangement, CalPERS, has millions of dollars invested in PG&E shares so many ordinary pension investors will be affected, not to mention the higher costs for energy that people in the state will have to pay from a replacement provider.

Who's next?

Global Index Funds

I have been making a few adjustments to my portfolio in recent months but I wanted to dig a little deeper into my global index funds to find out what proportion was invested in oil/gas and other areas I would rather avoid now such as tobacco and also aircraft production as air travel is the fastest growing contributor to global CO2 emissions.

My Vanguard Lifestrategy 60 fund has most of its equity holdings in 3 sub funds - Developed World (ex UK), US Equity and FTSE All Share which together account for around 85% of the total equities. The undesirable holdings for the Dev.World and US funds amount to around 8% and for the UK fund it is much higher at 18% due to the heavy weighting of Shell and BP. Unfortunately the UK All Share makes up 25% of the equity section of VLS which means I am holding almost the same value of undesirables in this as in the Developed World and US Equity combined. The total equity element of the fund is obviously 60% so I calculated that maybe 10% of my VLS 60 fund value is invested in holdings which are part of the problems we are facing.
VLS 60 Weightings
(click to enlarge)

I have also had a look at the situation with their socially responsible SRI Global fund. This has higher charges of 0.35% compared to 0.22% with Lifestrategy. It excludes investments according to eight ethical criteria which includes environmentally detrimental activities. The fund however includes big oil companies - I guess they are not (yet) considered to be damaging. The exclusion list is compiled by FTSE Responsible Investment Unit.
Vanguard SRI Global Weightings

I also hold the HSBC Global Strategy Balanced fund which has a far lower weighting to UK equities - currently just 2.9% compared to 15% for VLS 60. Here's a comparison v VLS I did in 2017.

5 Yr Comparison v Global Strategy Balanced (red line)
(click to enlarge)

Vanguard and BlackRock are the two largest asset managers in the world with combined AUM of around $12 trillion. Over the past decade they have become the biggest owners of the global economy. They are therefore the biggest owners of fossil fuel companies and therefore have a responsibility to hold the CEOs and boards of these companies to account and ensure they comply with their obligations under the 2015 Paris agreement. These asset managers have a big say in all the companies responsible for climate change. I believe they have a duty to divest funds out of companies that continue to pollute our environment and support those companies which make a positive contribution such as clean energy.

The campaign against Blackrock could equally apply to Vanguard.

The Future

I am fairly clear that the era of fossil fuels is ending, possibly much swifter than anyone could possibly have predicted just 5 years back. Also, we are seeing a dramatic drop in the price of renewable technologies such as wind and solar combined with advances in battery storage. Sentiment from consumers, business and politicians is shifting at pace as the scale of the climate threats become clearer.

I believe that as the shift in public opinion on this issue hardens, the pressure will mount for increasing divestment away from those companies which harm the environment, particularly those in the oil and gas sector. At the same time, there will be increased investment into sustainable solutions aiming to minimise the effects of climate change.

I guess these large oil companies will gradually adapt their businesses to move with the times. Both BP and Shell have pledged to more closely align their business models with global climate goals. I guess also that if they do not they will decline in size and become a smaller percentage of the index as alternative clean energy companies grow and replace them.

However, I will be making a few adjustments to my portfolio weightings over the coming weeks to reduce my exposure to big oil and gas. I made a start earlier this year by off-loading my holding in City of London as flagged up last September. BP and Shell are top 5 holdings and account for 11% of the portfolio. I will probably exchange some of my VLS 60 for more HSBC Global Stategy in the multi-asset global index department and maybe add the SRI fund.

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!

Monday, 4 February 2019

A Look at Green Bonds

As readers will know, I am increasingly concerned about climate change. The environmental risks dominated the recent World Economic Forum Global Risk Report 2019 (pdf). The authors of the report were so concerned they said "of all the risks, it is in relation to the environment that the world is most clearly sleepwalking into catastophe". 

The report from the IPCC last October made clear that if we allow global warming to rise above 1.5C, it could be far more dangerous than we thought just a few years previously. Over recent months I have started to make a few changes to my portfolio to reflect my concern about these issues and have been exploring a few 'green' investment options. 

We have just seen the hottest month on record in Australia followed by unprecedented flooding in Queensland. 

Average over 30C in January 

In Canada and US there has been extreme cold weather from a polar vortex caused by warming of the Arctic region. 

Minus 60C in Chicago in January

If nothing much changes, we are currently on track to reach 1.5C by 2040 and then 2.0C by 2060. We clearly need to make some big changes over the next decade to avoid a worst-case scenario. The global community is starting to implement some of these changes and businesses and governments are responding to the challenges so I remain optimistic.

On a personal level, I introduced a couple of green funds to my portfolio last year and I intend to increase the green allocation of my portfolio to at least 10% by the end of this year. However, both are equity based so I would like to have a little more balance so I have been considering green bonds, also referred to as climate bonds.

What Are They?

Much like conventional bonds, it is a bond which generally offers a fixed rate of return for a specified period of time however with the green bonds, the money raised is specifically earmarked for climate-related projects. These could be for projects to support a range of green initiatives such as energy efficiency, renewable energy, sustainable agriculture, cleaner transport, protection of ecosystems and environmentally friendly technology.

They are typically issued by large institutions such as the World Bank or European Investment Bank or by governments - sovereign green bonds - and to qualify for the tax advantages they offer, they need to have green bond status which involves verification from a third party such as Climate Bond Standard Board.

The London Stock Exchange introduced a dedicated green bonds section in 2015.


These bonds have been around for over a decade and are mostly only available to institutional investors such as pension funds. In 2012 these bonds issued around $2.6bn however in recent years there has been a huge surge in demand and by 2017 this had increased to $162bn. In 2018, over 1,500 were issued raising $167bn for green projects. The forecast for the coming year is $200bn.

This is just a drop in the ocean however as the IPCC calculated that we need to spend $2.4 trillion EVERY YEAR to 2035 to tackle climate change.

What's Available?

Access to these bonds is still mainly for institutional investors such as the large insurers and pension funds. However a couple of exchange traded funds have been launched for the UK retail investor in the past year or so.

iShares Green Bond Index (IE) which has ongoing charges of 0.22%

Lyxor Green Bond ETF (CLIM) with charges of 0.25%

VanEck Vectors Green Bond (GRNB) based on US market.

So today, I dipped a toe in the water with an initial purchase of the offering from Lyxor for my ISA. This has been funded from a sale of my holding in City of London trust. I am sure more green bond funds will be made available to the retail investor over the coming year or two so will hold back for a while and just see how I go with this for the time being.

Returns have not been so good over the past year for these bonds - maybe 1% or 2% but that was probably a little better than for global equities generally. They may not provide the same longer term returns as equities but I guess not all profit is quantifiable. Many investors are increasingly aware of the importance of tackling climate change but translating that awareness into concrete investment decisions can be challenging. The bonds offer me some diversity combined with the knowledge that my money is helping to hopefully change things in a positive way.

Further reading:

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!

Saturday, 26 January 2019

Aberforth Smaller - Final Results

The objective of Aberforth Smaller Companies Trust plc (ASCoT) is to achieve a net asset value total return (with dividends reinvested) greater than that of the Numis Smaller Companies Index (excluding Investment Companies) over the long term.

The trust's portfolio is diversified and will normally consist of investments in around 80 individual companies.

In seeking investments the approach will be fundamental in nature involving regular contact with the management of prospective and existing investments in conjunction with rigorous financial analysis of these companies. The emphasis within the portfolio will reflect the desire to invest in companies whose shares represent relatively attractive value and a preference for holdings with low or no gearing.


They have recently published final results for the full year to 31st December 2018 (link via Investegate)
In contrast to the gains of recent years, 2018 has not been such a good year with share price total return of -11.8% compared to its benchmark index, Numis Smaller Companies index Total Return of -15.3%. The return for the FTSE All Share in 2018 was down -9.5% by way of comparison.
It appears that Brexit concerns have disproportionately affected UK smaller companies this past year, however I also note the portfolio is overweight in oil & gas producers compared to the index. With climate change taking center stage, this is a concern for me and I have written to the management suggesting they may wish to review their holding in this sector and consider renewable energy alternatives for the portfolio. I will be interested to hear their response!
5 Years v FTSE All Share
(click to enlarge)


The board are proposing a final dividend of 20.75p payable in March, making a full year increase of 5.0% to 30.25p per share. In addition, as last year, a special dividend of 7.75p is proposed as the trust has received special dividends from several portfolio holdings. Revenue reserves have increased by a further 10% to £88m (2017 £79.9m).

At the current price of around £12.10, the trust has a natural yield of 2.5% (and 3.0% including the special dividend).

I would not advocate a large holding of small caps in any portfolio, however a weighting of between 5% - 10% is likely to boost total returns for the long term investor.

Over the past year or so I have disposed of quite a few of my investment trusts however, depending on the response from management, I am happy to continue with Aberforth for the longer term. My current holding is around 2% of my total portfolio so either way it's not going to make a huge difference.

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!

Friday, 18 January 2019

One Million Pageviews for the Blog!

Well, here we are...1 million people have visited the blog over the past 6 years...whodathoughtit! If I had £1 for each visit I would be doing well...ha ha.

During this period I have posted a total of 447 articles which attracted over 1,000 comments.

Evolving Strategy

Looking back, it is striking just how much my investing journey has moved around. Partly this has been influenced by reflecting on the input of readers, partly from changing circumstances such as the recent transition to State pension and also a fair share of poor decisions resulting from good old irrational thinking.

In the early days, my investing strategy was all about generating natural income from a mix of high-yielding UK shares and a basket of mainly UK-focussed investment trusts. My target income was 4% of my combined SIPP and ISA investments with the intention to reinvest any surplus.

This had worked just fine since I decided to move to early retirement in 2008 at age 55 yrs. At some point in 2014/15 I was beginning to take a closer look at this strategy and came to the conclusion that the focus on high income shares and trusts was limiting my investing horizon. For example, I had ignored the option of low cost global index funds such as Vanguard Lifestrategy because the yield was only 1.4%.

By this time I realised that maintaining a portfolio of 20+ individual shares was probably more trouble than it was worth and so began the process of off-loading them gradually in favour of my global index funds. As I said in this review of strategy post -  

"Individual shares have been interesting but they are volatile and I have not noticed any greater return to my portfolio for the additional risk so I will wind down the rest of my shares portfolio in the coming months and move the proceeds into collectives".

Today, I am looking to preserve what I have accumulated with my core of multi-asset global index funds and also look to the future with some of my technology and 'green' investments.


Of course, the blog has been a useful platform to showcase my books. The first was "DIY Introduction to Personal Finance" self published in February 2012, a year before I started this blog. It was followed by "DIY Pensions" which is by far the most purchased title with just over 60% of sales (ebook & paperback combined), then "DIY Income" in 2014 and finally my second most popular seller "DIY Simple Investing" published in 2015 which accounts for 20% of the total.

I hope I can shed a little light on the mysteries of the self-directed investing process and help readers to take more responsibility for their future financial well-being.

Popular Articles

The main purpose of starting the blog was to keep a journal of my investing journey. Some of the articles are obviously more interesting to readers than others. The ones that have attracted most attention are usually when they are mentioned in a link by Monevator!

Here are some of the more popular - in no particular order :

In April 2015, I had been thinking about a more globally diverse strategy and wrote "VanguardLifestrategy - A One-Stop Solution". This subsequently morphed into the concept of "DIY Simple Investing" and for which I wrote this guest post on Monevator.

The annual updates on progress with my self-managed drawdown SIPP are popular but the nuts and bolts of how to work out the amount required for a decent retirement in early 2017 has proved the most popular of all the pension-related articles.(link here)

Asset allocation is an important aspect of the investing process. The better returns will most likely come from holding investments over many years so it's important for the DIY investor to find a strategy which will enable him/her to stay in the game for the long term, particularly during periods of volatility as we have experienced in recent months. This revised article on the subject was written in May 2016.

Just a few of the most read articles over the years - more are listed under the 'popular posts' tab above.

So, I am about to enter my 7th year with the blog. I'm not sure if I will manage to get to two million pageviews but will carry on a while longer. When I started out there were not too many investing bloggers around - Monevator and Retirement Investing Today spring to mind from the UK. Today there are lots more which is good to see.

Many thanks to all the people out there who dip in from time to time to share the journey and especially for many of the comment which have given me much food for thought as well as an opportunity to reflect on many of the mistakes I have made along the way.

Finally, an apology to those who really do not care to read about Brexit or Climate Change. Hopefully, the former can be put to bed before very much longer (?) but I have five grandchildren so the latter is likely to increasingly influence my thinking and also my investing decisions.

It's therefore appropriate to finish with a quote from Antonio Guterres, UN Secretary General, Sept 2018

"Nothing less than our future and the fate of humankind depends on how we rise to the climate challenge"