Tuesday, 18 June 2019

SIPP Drawdown - Year 7 Update

Wild Honeysuckle (Clunton, Shropshire)
It's June, another 12 months has rolled by so it must be time to review my SIPP drawdown portfolio at the end of its seventh anniversary. Here’s a link to the previous update of June 2018.

The original plan when I started drawdown in 2012 was to generate a rising natural income from which I would withdraw 4% income which I calculated should be sustainable over the longer term without depleting the capital. This would bridge the 10 year gap between early retirement at age 55 yrs and state pension.

Last year my state pension kicked in so I am no longer reliant on income from my SIPP which means I have more flexibility on investment choices.

Portfolio Changes

My efforts to move towards a more climate-friendly portfolio are well documented and this includes my drawdown portfolio so there have been a quite few changes over the past 12 months. My main considerations are to avoid fossil fuel companies - and therefore the sale of Vanguard LS 60 (high weighting to FTSE), City of London, Aberforth Smaller and Edinburgh - and also to support renewable energy and other environmentally friendly funds which are more aligned with my values. Hence the introduction of Bluefield Solar, TRIG, iShares Clean Energy ETF and also Vanguard SRI Global.


I am currently mulling over the sale of Scottish Mortgage Trust as I see from the latest annual report that it has recently acquired a holding in Elon Musk's SpaceX.

As I no longer need to take an income from my SIPP, I can now dispense with the cash buffer of around £4,000 or 10% of the Vanguard fund and this has now been fully invested.

Performance

So far this year the markets appear to brush aside the political uncertainty of Brexit and the tensions arising from trade wars between USA and China <cue market correction>. There was a brief dip in the FTSE below 7,000 in December/January followed by a quick rebound but this is nothing more than normal market volatility. Over the 12 months, the FTSE 100 has seen a modest decline of 2.5% from 7,631 to currently 7,443...but maybe a gain of 1.5% total return including dividends. My SIPP portfolio is now more fully invested and it is pleasing to see a modest gain of 4.4% over the year. This includes all transaction costs resulting from portfolio churn.

With so many sales/purchases, it's difficult to compare the years performance for individual elements however HSBC Global Strategy Balanced made a gain of 5.0%, Vanguard LS 40 a gain of 5.7% and Capital Gearing a gain of 6.7% including dividends.


Here is the portfolio

(click to enlarge)

Comparisons

In June 2012 when I started this series on my drawdown journey, the FTSE 100 was 5,500 and has risen to 7,443 - a gain of 35%. If we add in average dividends of say 3.8% each year, this gives a rough total return of 62%

When I started my drawdown in June 2012, the Vanguard LS 60 (acc) price was £105 and today stands at £191 - a gain of 82% or annualised average of 8.9% p.a.

Taking account of the income withdrawn over the past 7 years of £19,400, the total return including income is 84.7% which is very satisfactory and works out at an average annualised return of 9.2% p.a.



State Pension

For most of the past decade I have relied upon income from my SIPP to supplement my ISA income and bridge the 10 year gap between early retirement at age 55 yrs and state pension. This part of the journey is now 'mission accomplished'.

My state pension has now been in payment for just over a year which is long enough for me to know that I do not need to continue with drawdown from my SIPP...although I can always dip in at any time for a lump sum withdrawal if required. I will therefore be less reliant on the income from my SIPP for essential living costs and it will become more for discretionary spending or more likely remain invested. Unlike an annuity which, once purchased means the capital lump sum is lost forever, any residue in my SIPP will pass on to my children and grandkids...tax free if I go before 75 yrs and thereafter possibly 20% or tax free depending on circumstances. For those interested here's a link on the AJ Bell site.

Conclusion

Obviously I am reasonably happy with my first few years of self-managing a flexi-drawdown sipp portfolio. For the first few years, the dividend income predictably rolled in much as planned and importantly, increased each year a little ahead of inflation. During the next three years I have withdrawn significant lump sums tax free and placed the excess which I did not require for income in my ISA. Of course, there are no tax liabilities for all monies subsequently withdrawn from my ISA.

I now need little or no income from my SIPP in the future and will therefore focus on longer term growth combined with environmentally responsible options. As I am no longer depleting the capital, this should hopefully grow much the same as during the accumulation phase before drawdown and in the knowledge the pot can be inherited by children and grandchildren possibly tax-free at some point in the future.

For me, the big advantage of the SIPP is the flexibility it offers. I started off with a portfolio of income-generating investment trusts and PIBS. I then introduced the multi-asset, globally diverse index funds such as Lifestrategy and now I can sell the funds which are not required and replace with more climate-friendly options to satisfy my desire to do my bit for the environment. I can also withdraw as much or as little cash as needed.

What's not to like!

If you are managing your SIPP - accumulation or drawdown - or you are planning to do this, feel free to share your experience in the comments below.

Sunday, 2 June 2019

TR Property - Final Results

I hold this property trust in my ISA and also my Sipp drawdown portfolio. It is a little different to most property funds in that it mainly holds the shares of other property companies and has just 8% of the portfolio in property directly. This has advantages regarding flexibility and lower costs.

The fund is managed by Thames River and aims to maximise total return by investing in international property shares and direct property mostly in the south east of UK. Manager, Marcus Phayre-Mudge has been involved in property investment since 1992 and has been involved in running the Investment Trust since 2004.

At the end of April the largest geographic exposure was a 39% weighting in UK property shares and a further 8% in direct property, then property shares in European companies - France making up a further 15%, Sweden 9% and Germany 30%. 

Retail and office space accounted for 22% and 31% respectively, with another 33% in residential and the remainder divided between industrials and diversified such as student accommodation and storage.

Results

The trust has recently published results for the full year to end March 2019 (link via Investegate). Net asset total return has increased by 9.1% (last year 15.5%) and share price by 6.2%.

Commenting on the results, chairman Hugh Seaborn said:

"In an environment where investors are seeking income, property benefits from the characteristic of offering relatively high income returns, often growing with inflation. Our Manager continue to focus on real estate businesses in areas and sectors which offer the likelihood of rental growth. The divergence in performance between companies with those attributes and the remainder has widened to record levels. This does create the risk of the most popular names becoming overbought and the least popular are at risk of being oversold. Our Manager remain vigilant, keeping a very close eye on earnings - the bedrock of this asset class.
Our confidence in the stability of earnings and the relative attractiveness of the asset class versus other risk assets offers little succour in the event of broader market weakness. The impact on the UK, and to a lesser extent Continental Europe, inflicted by unprecedented levels of political uncertainty may well only become apparent in years to come. What we do know, at the time of writing, is that we remain in a period of great political uncertainty and I take the opportunity to remind shareholders of the broad pan European spread of our assets". 
Income

Revenues have increased and as a result the final dividend will be increased to 8.6p (last year 7.55p) making a total of 13.5p for the year, an increase of 10% compared to the previous year (12.2p). It has produced compound annual dividend growth of 12.5% p.a. over the past 5 years and this has been fully covered by property revenues. The shares yield 3.3% at the current price of 408p.
 
5 Yr Comparison v FTSE All Share

This trust has so far been a very positive addition to my portfolio - the share price is up 40% on my purchase price at the end of 2016, plus the dividend has increased by 80%. Obviously off to a good start but I expect a little volatility in the share price until the Brexit saga is resolved...could be a while yet. However, the income seems fairly secure and I am happy to continue with my current holding as property offers diversity to 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!

Thursday, 30 May 2019

Capital Gearing - Final Results


The aim of this trust is firstly to preserve capital and then to achieve capital growth in absolute terms rather than relative to a particular stock market index, principally through a wide variety of investments including variable weightings of investment trusts, cash, bonds, index-linked securities and commodities when it is considered appropriate.

It is just over two years since the trust was added to my portfolio as a 'safe house' for some of the proceeds from various sales. After several years of above-average returns from equities, it seemed like a good plan to shelter the profits and de-risk the portfolio.

There are a few trusts which offer to preserve capital such as Ruffer, Personal Assets and RIT Capital Partners. They all work on the principle that accepting a more solid but lower return from a diverse asset mix is a price worth paying for the peace of mind from not suffering potential losses from riskier or more concentrated assets.

Results

The trust has recently announced results for the full year to 5th April 2019 (link via Investegate). Total return per share has increased by a respectable 7.9% with net assets increasing to £40.82.

Income

The focus of this holding is capital preservation rather than income. Last year the dividend was 27p however this year revenues have again increased to 51p and the board have proposed an increased payout of 30% to 35p which includes a special dividend of 12p. The yield however is still less than 1.0%.

Asset Allocation

The portfolio is currently very defensive with 35% in cash or short-dated gilts and a further 25% in US inflation linked government bonds. Then there is 18% allocated to preference shares and corporate debt. A further 15% is allocated to property and then a similar percentage to equities.

I was particularly pleased to note that new positions have been opened in renewable energy infrastructure with the additions of John Laing Env. Assets Trust, TRIG, Greencoat UK Wind, Foresight Solar and Greencoat Renewables. The combined returns from these additions was 20% so I hope this will encourage the management to increase their weighting over the coming year.
  
Commenting on the year, manager Peter Spiller said

"With real rates set to remain at historically low levels, it is not easy to identify a short-term catalyst that will bring an end to the current business cycle and the associated powerful equity bull market. The fragile macro-economic backdrop, combined with elevated equity and bond valuations, suggest that portfolio returns will be modest over the medium term and could be negative if there is a period of recession. 

As with the past year, capital preservation remains the key objective of portfolio allocation, until valuations return to more attractive levels. An objective of merely preserving capital sounds modest. But, if it can be delivered over a period of normalising asset prices it will represent a significant achievement and lay the foundation for potentially more exciting returns in the future".

3 Yrs Comparison v FTSE All Share
(click to enlarge)

I am reasonably content with my first couple of years. Certainly I would be happier if the trust did not have 2.2% holding in a FTSE 100 ETF and maybe that positition will be reduced in due course. The current share price is £42.50 which is 10% up on my purchase price. In addition there is a further 2% in dividends so an average of 6% p.a. is not too bad for a very defensive portfolio. I am also encouraged to see the ongoing charges have reduced from 0.77% to 0.70%...every little helps.

The trust provides a good counter-balance to some of my racier holdings such as Scottish Mortgage and Mid Wynd and the proof of the pudding will be the combined return on the whole basket at the end of 5 years.

So, back to the bottom drawer with this one and review again at the same time next year.

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, 27 May 2019

Brexit Revisited


Well, here we are, almost 3 years on since we voted to leave the EU and not only have we not left, we have actually taken part in electing even more MEPs to Brussels! How on earth has it come to this?

In my article on the Brexit fudge last July, I covered the situation following the Chequers gathering and suggested the PM would struggle to get the agreement through parliament and would end up resigning. It took a little longer than I thought - three failed attempts to get the bill through the Commons, but inevitably Mrs May conceded defeat and will step aside on 7th June.

We have seen a number of indicative votes on a range of options discussed by MPs - customs union, no deal, revoke Article 50, second referendum - but nothing has a clear majority. The reality is that we have a remain parliament which does not really want us to leave the EU in any meaningful way and which has therefore been at odds with the country which voted 'leave'. There are many millions of people who are naturally frustrated and angry that the referendum result has not been delivered. There are also many on the remain side who continue to call for Brexit to be cancelled or at least for the chance to have a second referendum.


It is therefore no surprise that, with parliament in deadlock and unable or unwilling to deliver Brexit on 29th March coupled with the requirement for us to take part in more EU elections, we have the re-emergence of Nigel Farage and his new Brexit Party.

The EU Elections

So, we had another vote last Thursday and it's fairly clear that people are rejecting the half-in/half-out compromise of the past couple of years dished up by the main two parties. The ruling Tories slumped to 5th place behind the Greens and lost 15 of their 19 MEPs and managed just 9% of the national vote - their worst ever election result in almost 200 years. Labour did slightly better losing 10 of their 20 MEPs mainly to a resurgent Lib Dems who gained 15 MEPs.

2014 EU Elections

The new Brexit Party were the outright winners however both 'remain' parties, Lib Dems and Greens also did well and therefore I suggest the battle lines are now clearer leading to the new deadline:

a) 'leave' come what may by 31st October, or

b) go back to the people to reverse the referendum and 'remain'

The results were:

1. Brexit Party        32%  (29 MEPs)

2. Lib Dems           20%  (16 MEPs +15)

3. Labour              14%  (10 MEPs  -10)

4. Greens              12%  (  7 MEPs   +4)

5. Tories                 9%  (  4 MEPs  -15)

6. SNP                    4%  (  3 MEPs   +1)


2019 Results

For someone who voted to leave back in 2016, my decision has not changed. The politicians gave us the referendum. It was billed as a 'once in a generation decision'. The question on the ballot was 'leave' or 'remain' and parliament promised to implement the outcome. We chose to leave with a majority of 1.3 million people. The problem has not been with the people who voted but with the remain politicians and civil servants entrusted with delivery of the decision.

If the result had gone the other way, I would not be jumping up and down demanding we withdraw a bit more from the EU to satisfy the 48% who voted to leave. No, I would have accepted the decision to remain - that's how democracy works...the losers have to accept the decision and move on. In the final analysis, democracy isn't really democracy if our politicians decide to just ignore the results they don't agree with.

We voted to leave and the wishes of the majority must be respected and those who voted remain should now accept the decision. Regardless of how the new PM and cabinet proceed, the simple fact endures that we cannot move forward as a country until the 2016 vote has been respected and we have left the EU. Therefore, the referendum outcome must now be delivered - deal or no deal.

Call me old fashioned but for me, it's all about integrity and democracy. I honestly do not believe a second referendum would resolve this issue. People would quite rightly ask "What did you not understand about the instruction we gave last time?" It would prolong the agony and would create more uncertainty and divisions.

We now need decisive action from the politicians to respect the result of the 2016 referendum...I'm not holding my breath.

Feel free to have a say on Brexit in the comments below. What do you make of the past three years? Has your position changed or does it remain the same? How do you see it being resolved?

Monday, 20 May 2019

Vanguard Lifestrategy 60 - Year 4 Update


It is now four years on since my initial purchase of this all-in-one fund in May 2015 so time for another annual update,

I believe the average investor could do well from adopting a very simple, no-frills low cost diy strategy which makes sense, which can be tailored to fit in with a variety of attitudes to risk/market volatility and has every chance of providing a decent outcome. However, I am also becoming more aware of the risks posed by our climate emergency and in February I had a closer inspection of the funds exposure to fossil fuels which I am trying to avoid as I am wanting to more closely align my portfolio with my values and lifestyle. Here's a link to the article.


After some consideration of the options, I have decided to stay with the Lifestrategy for the time being but I have taken a step down from the VLS 60 to the VLS 40 to reduce my exposure to equities generally and to fossil fuels in particular. The problem for me is the 25% weighting of the equities element in the Lifestrategy range to the FTSE All Share Index which is overweight in oil & gas stocks - mainly Shell and BP. In addition, I have urged Vanguard UK to review their range of funds in relation to climate change. I was pleased to have an opportunity to speak with one of their senior management team earlier this month and I am hopeful of seeing the launch of a climate-friendly fund later in the year.

I have also diverted some of the proceeds from my VLS 60 into their SRI Global fund as a compromise. In addition, I have re-allocated some of the funds into HSBC Global Strategy which has a much lower weighting to the UK - less than 5% and therefore much lower exposure to the oil & gas sector.

A One-Stop Solution

The Vanguard LifeStrategy funds offer a balanced portfolio of globally diversified equities combined with some gilts and corporate bonds. You are invested in 11 industrial sectors and 12 different types of investment, 17 specialist funds, spread across 25 countries and some 18,000 individual shares and bonds.

They were introduced in June 2011 and provide investors with a neat solution to match their asset allocation between equities and bonds -  from 20 to 100. The number represents the level of equities held in each fund, therefore the LS40 will have 40% equities and 60% bonds; the LS80 will have 80% equities and 20% bonds.

The single funds LS20, 40, 60 & 80 will hold a blend of around 17 or so of the Vanguard stand-alone equity and bond funds. Each of these will hold many hundreds of individual stocks or bonds - for example, just 1 of the 17 constituents is the FTSE Developed World (ex UK) fund which alone holds ~2,000 stocks & shares.

Therefore, by holding just a single LifeStrategy fund, your portfolio is widely diverse with over 18,000 stocks/bonds from all around the world. The bond element (assuming you do not want the 100% equity) will comprise a combination of UK gilts, global bonds, corporate bonds and inflation-linked gilts. The equities element includes their UK all share tracker, global funds and some exposure to emerging markets.

The big advantage for me is the auto rebalance to ensure the fund always remains at the risk level selected at the start. The funds are frequently rebalanced - possibly daily.

I had a look at annualised returns for each fund from inception to end April 2019 (just short of 8 yrs):

LS20    5.74% p.a.

LS40    7.06% p.a.

LS60    8.34% p.a.

LS80    9.54% p.a.

LS100 10.67% p.a.


Vanguard LifeStrategy 40 Mix

I have therefore moved some of the proceeds from the 60 sale to top up my VLS40 which is the second most popular with UK investors and has £3bn of assets. Just looking under the bonnet of the fund -

40% equity comprised of Developed World (ex UK) 19.6%, FTSE UK All Share 10.0%, US Equity 5.1%, Emerging Markets 3.3%, Europe (ex UK) 1.3%, Japan 0.7% and Pacific (ex Japan) 0.4%

60% bonds comprised of Global 19.3%, UK Gilts 8.8%, UK Corp. Bonds 5.4%, UK Inflation-linked Gilts 5.8%, US Credit Index 5.3%, US Gilts 5.1%, Others 10%

The ongoing charges are 0.22% (worth noting its US equivalent charges 0.13%)

Performance of VLS 60

So, just to complete the figures following the sale - I made my initial purchase in my ISA with Halifax Share Dealing in May 2015. My average purchase price was £136.50.

The price four years on, to the point of sale was £186.67 so a gain of 36.7%. This is an average annualised 8.1% p.a.

By comparison, the total return for the FTSE All Share over the same period is around 24% so the combination of 40% bonds and a wider exposure to global equities in the VLS fund has worked very well.

Of course, the bonds provide a much less volatile ride compared to a fund with just equities which makes it easier to remain invested. As I am not the type of person who can handle too much volatility, the step down to the VLS 40 should help me to stay invested and this is why they represent a large percentage of my portfolio.

Here are the total return for the VLS60 for each of the last 7 full years :

2012   9.29%,
2013 11.13%
2014   9.36%.
2015   2.53%
2016 18.27%
2017   8.67%
2018  -3.10%



The appeal of the VLS strategy is its simplicity and auto rebalance combined with good performance compared to other strategies. However, with climate change rising to the top of the agenda all around the world, many investors and fund managers will be assessing the impact of fossil fuel companies and evaluating the risk of continuing to hold such companies in their portfolio.

Personally, I do not wish to profit from investing my money in companies that continue to add to global warming and so holding multi-asset global index funds presents me with a challenge as I attempt to climate-proof my portfolio for the future.

The solution, which I have discussed with Vanguard UK, would be for them to offer investors a choice of fossil-free climate-friendly equity funds and balanced with a mix of gilts and green bonds. I will retain my VLS 40 until the end of this year in the hope they can deliver but time is of the essence - we have declared a climate emergency!

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!

Thursday, 16 May 2019

Scottish Mortgage Trust - Final Results


Scottish Mortgage is an actively managed, low cost investment trust, investing in a high conviction, global portfolio of companies. The managers aim to achieve a greater return than the FTSE All World Index (in sterling terms) over a five year rolling period.

This investment trust was added to my SIPP portfolio at the start of 2017 at the initial purchase of 338p. A year later, following a little turbulence in the share price, I added SMT to my ISA portfolio at 415p. The share price has advanced to currently 530p however the price can be volatile as witnessed towards the end of 2018.

Results

The trust has today issued results for the full year to end March 2019 (link via Investegate). Share price total return for the past year is up 16.5% compared to 10.7% for the benchmark FTSE All-World index.  

Scottish Mortgage has increased total net assets to more than £7bn making it one of the UK's largest investment trusts. In 2017 it became the only investment trust to be listed in the FTSE 100.

The managers, James Anderson and Tom Slater run a conviction portfolio of around 70 to 80 shares. The result is a portfolio dominated by big holdings in some of the companies involved in the world of social media, the internet, healthcare, eco-friendly energy and gene therapy. 

The top ten holdings account for 51% of the portfolio and include Amazon 9.6%, Illumina 7.6%, Tencent 6.6%, Alibaba 6.6%, Tesla Motors 5.3% and Netflix 3.1%. The managers have authority to hold up to 25% of the trusts assets in unquoted companies such as early stage start-ups. Currently, some 17% of the portfolio is invested in 40 unquoted companies - Dropbox, peer-to-peer lender Funding Circle and airbnb to name three I am familiar with.


China

Some 22% of the trust's portfolio are allocated to China. In the past year, the trust made their largest single investment in Ant Financial as a result of a long standing relationship with its parent company Alibaba. 

China's economy is growing at a rapid pace as it becomes increasingly consumer-led. It is now the second largest economy in the world behind USA and has been the largest contributor to global growth since the meltdown of 2008. Annual growth is averaging 7% each year and over just the past 10 years, real terms household income has increased by 120% and more and more of the huge population of 1.3bn continue spending (and also saving).

Tencent, the Chinese internet giant behind the WeChat messaging app (over 1bn users), has surpassed Facebook in value after it became the first company in China to be worth more than $500bn.

Scottish Mortgage offers a clear, consistent and simple proposition: a portfolio of long term investments in what the managers believe to be the best growth businesses, operating in any industry and anywhere around the world.
Many of the companies held in the trust's portfolio are disrupting the traditional ways of doing business. They create new markets or impact significant changes on old markets in a wide range of industries such as auto, health, advertising, retail and manufacturing which are transformed by advances in the technological revolution. 

SMT (blue line) V Vanguard Lifestrategy 100 past 5 yrs
(click image to enlarge)

I was however, a little disappointed to see they have acquired a holding in Space Exploration Technologies which is an unlisted enterprise involved in the design, manufacture and launch of rockets and spacecraft. And on a linked theme, nothing to indicate concern about the threats posed by our climate emergency. I hope this will be an issue that is taken up at the AGM on 27th June.

Over the past ten years, the trust has delivered a return of 737%. Although this is essentially a global growth trust, it is worth noting it has increased its dividend every year for the past 35 years. The increase this year will be 2% making a total of 3.13p and the current yield of 0.6%.

The ongoing charges remain at 0.37% which makes it one of the most competitive trusts on offer.

Obviously I am pleased with progress since my purchases but I hope the managers will switch on to climate at some point and until they do, I probably will not be adding to my position. For now the current holdings can return to the bottom drawer.

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, 6 May 2019

I'm Getting Up to Speed on Climate Emergency


With the direct action of Extinction Rebellion in London over the Easter period (over 1,000 arrests), the BBC's hard-hitting "Climate Change - The Facts" and the rise of the school strikes for climate started by Greta Thunberg, there is no doubt that our climate crisis is quickly climbing to the top of the political agenda. 

The focus of the challenge is directed towards governments which have not been taking climate seriously. As a result, last week our parliament declared a climate emergency - the first country in the world to do so! It's not so clear what action this declaration will bring about but there can be little doubt that there will be some big changes to come.

Over the past six months or so, I have tried to get my head around this important subject - the science, what the consequences may be if we carry on with business as usual, what that may mean for our economy and my investments, what needs to be done to avert the worst-case scenarios. So, in this article, I wanted to clarify my thoughts on the subject.

Of course, climate change is nothing new - our climate is continually changing. The last ice age ended some 12,000 years back when vast areas of the Northern hemisphere including the UK and much of Europe and N America was covered by a vast ice sheet. The Earth has moved in and out of these naturally occurring interglacial periods for at least two million years.

The current man-made climate change however is interrupting this natural cycle and the warming we see today is well outside of the pattern of the past 800,000 years. The problem we are facing at present is the speed at which our planet is warming and our ability to adapt to the relatively rapid increase in temperature.

The Problem

Over the past 150 years or so, the average global temperature has increased by around 1C. This is due the industrial revolution and increasing reliance on coal, oil and gas. These are fossil fuels which release greenhouse gas emissions (GHG) such as carbon dioxide and methane into the atmosphere when burnt to create energy for our homes, transport and factories. The scale of these emissions has gradually increased due to an ever accelerating global population and growing affluence of developed nations which means more houses, cars, lorries, shipping and airplanes.

GHG Concentrations over past 1000 years
(courtesy of wxshift.com)

These GHGs are trapped in the upper atmosphere and hang around for many years after they are released. Some of the gases are naturally absorbed by the seas (25%) and by our trees but we have been producing much more than nature can deal with. Over time, these gases build up and form an ever thicker layer in the upper atmosphere which traps some of the sunlight and causes gradual warming.

The levels of CO2 in the atmosphere is measure and currently stands at 415 parts per million (ppm) which is the highest concentration for the past 3 million years. The average over the past 500,000 years has been 260ppm. When I was born in the 1950s it was 310ppm and the global population was 2.5 billion.


The last time we had CO2 levels this high, the global temperature was 3C to 4C warmer than today and there were trees growing at the south pole.

Despite the agreement reached in 2015 in Paris by 200 world leaders, CO2 emissions continue to rise. In 2018, global emissions rose by a further 1.7% to a record high of 33.1 Gt of CO2 and the highest increase since 2013. Coal for power accounted for a third of this, mainly in Asia. China, India and the US were responsible for 85% of this increase whilst emissions reduced in Japan, Germany, France and the UK.

The global population is growing - currently 7.5 billion - and as the economy grows to meet demand for more goods and services, the demand for energy increases.

The Consequences

This rapid rise in GHGs which has caused the 1C rise in global temperature is starting to impact our global weather patterns. The past 5 years have been the warmest on record all over the planet and this trend is due to continue due to the GHGs already locked into the atmosphere. This is leading to more powerful cyclones/hurricanes, severe flooding, more intense wildfires, droughts and changes to natural habitat which is already leading to the extinction of animals and plants as well as coral reefs.


These severe weather events have already caused loss of human life - 3,000 people died in hurricane Maria in 2017 when it hit Dominica and Puerto Rica. In Kerala, India last year an estimated 500 people died during storms and flooding. In March 2019, cyclone Idai stuck Mozambique with devastating effect - hundreds killed and up to 2 million people displaced and made homeless by flooding. These are just three examples of the hundreds of extreme weather events of recent years.

In addition to the impact on every days lives, there is a massive economic cost from climate change. Insurance group Swiss Re have reported that climate-related losses have averaged $180 bn each year over the past 10 years. In January 2019 the World Economic Forum's Global Risks Report at Davos ranked extreme weather and failure to adapt to climate change as the top two global risks

The polar ice caps are warming at a faster rate than the global average. The latest estimates are for at least 3C by 2100 which would lead to the thawing of large areas of permafrost and the release vast amounts of carbon dioxide and also methane gas which is 20x more potent than CO2. This would cause additional warming and result in a tipping point which could lead to a runaway warming which far exceeds current forecasts.

The world's largest ice shelf in Antarctica - the Ross Ice Shelf - is the size of France and several hundred metres thick. It is melting ten times faster than originally thought. This could lead to rapidly rising sea levels around the globe.

Some Solutions

We have reached a crossroads - if we carry on without making any serious changes to the way we live our lives, we face unimaginable consequences. If we continue to do what we've always done, we will get what we've always got - an ever warming world. So it follows, we need to change what we've always done in order to get a different outcome.

We have collectively generated more GHGs than the planet can reabsorb. We understand the problem and we know what needs to be done - and, importantly, we have all the tools and technology already to address the problem. We now just need to get on and DO IT.

We need to get to net zero emissions quickly. Some people suggest 2030 and others a more realistic transition of 2050. The term 'net zero' includes reductions in all GHGs such as methane and nitrous oxides - carbon neutral only refers to carbon dioxide. Perhaps a clearer term would be 'climate neutral'.

1. Plant more trees - trees absorb CO2 and if we quickly plant millions more trees and stop clearing rainforests for cattle grazing, it will provide a breathing space for other initiatives to kick in. Support more tree planting via The Woodland Trust.

2. Energy - transition from coal,oil & gas to renewables such as solar and wind. These renewable sources of power are now actually cheaper than fossil fuels so just on economics alone, it makes sense to speed up the process.

3. Transport - a top consumer of fossil fuel such as petrol, diesel and kerosene (aviation). It is responsible for around 25% of energy-related emissions. Electric vehicles are part of the solution...provided the electricity comes from renewables.
International shipping is a major polluter and accounts for around 3% of global emissions and around 20% of emissions from transport. Maersk, the worlds largest container company has recently announced a policy to be carbon neutral by 2050. It would be technically feasible to decarbonise shipping using biofuels and renewable energy by 2035 according to the OECD.


Aviation is one of the fastest growing sources of GHG emissions. If it was a country it would be in the top 10 emitters. One round trip from London to New York is the equivalent of heating a house for the whole year. Aircraft are becoming more efficient all the time but we are flying more. Until electric planes are introduced on a commercial basis (trials underway), the only solution is for individuals to choose to fly less.

4. Food - Our global system is responsible for a whopping 40% of global emissions. Transport accounts for around 17%, packaging a further 10%, refridgeration 4%, distribution to retailers 4%, our journeys to the shops and when we get it home, a further third is thrown away which adds further to emissions. We need to become more self-sufficient as a country, to stop wasting food and also think about food miles.

Meat and dairy is a huge factor in global warming. Emissions are on track to become the worlds biggest contributor to climate change and already surpass the likes of Shell and Exxon Mobil. As well as the increasing levels of GHGs such as methane from livestock, there is deforestation to create more pasture and pressure on water supplies. Much of the forest is cleared by 'slash and burn' which adds to the problem.

The solution is relatively simple - people can consume less meat and dairy and move to a plant based diet. Check out your diets carbon footprint.


The UKs Performance

Here in the UK, our record on cutting back on CO2 emissions is good compared to many other developed countries. We have reduced emissions by 39% compared to 1990 levels. This figure however excludes emissions from air travel and shipping.

Our emissions levels are now back to where they were in the 1890s when Queen Victoria was on the throne.

Much of the reductions in recent years are due to moving away from coal as a power source - down 16% in 2018 and 80% over just the past 6 years.
According to the latest analysis of government projections, around 50% of our electricity will come from renewables by 2025. This is mainly due to the rapidly falling cost of solar and wind generation rather than any change in government policy.

However the Committee on Climate Change are concerned that we are not making sufficient progress in many areas of our economy. Whilst we are doing well on power generation which accounts for around 25% of emissions, we are not doing enough in other sectors to reduce CO2 emissions, particularly transport/aviation and housing.

Greta Thunberg

Our current target is 80% reduction by 2050 but this lacks ambition and we are off-track to meet our 4th and 5th carbon budget targets. To meet our obligations under the Paris agreement, we need to achieve net zero emissions by 2050 and this is the recommendation of the recent report from the independent Committee on Climate. This would involve a reduction of around 8% each year. Hopefully, as our parliament has now declared a climate emergency, there should be no problem in adopting the new targets.

It's one thing to adopt a recommendation, and quite another to implement the policies to make it happen.There could well be much resistance to the transition from the familiar to the new. For example, around 90% of our homes have gas central heating. Most systems will have been fitted in the past decade and will be very expensive to replace. People are used to the technology and it works - heating and hot water at a reasonable price at the flick of a switch. Millions of home owners will need to be persuaded to switch to electric heating - the costs of the switch will need to be affordable and the technology reliable. I suspect the transition to a carbon neutral UK will be a monumental effort and certainly take much longer than the 2025 demanded by the protestors.

Here's an excellent in-depth analysis from Carbon Brief

Investors

Most savvy investors understand that in order to secure our long term financial goals, we first have to learn to live within our means and then save for the future. This principle can be applied to global warming - we must learn to live collectively within the sustainable limits of our planet. There will be few attractive investment opportunities for a world above 2C.

So, what are us small investors supposed to do? I guess we are all different with our individual perspectives and goals so there is no 'one-size-fits-all'.

Personally, I have decided to reduce my overall exposure to equities. I have moved from Lifestrategy 60 to LS 40 (but this is still a problem), I have reduced my exposure to big oil via the sale of City of London, I have recycled some of the proceeds into Vanguard SRI Global, I have built up my 'green' portfolio which now accounts for just over 1/3rd of my total investments. I have contacted Blackrock requesting they offer climate-friendly index funds. Last week I had a long conversation with Vanguard's senior management in the UK to urge them to introduce a climate-friendly option for my investments (following many email requests!). I am assured they are actively looking to introduce ESG or fossil-free funds but no time-frame.

The more pressure from concerned investors, the more they are likely to act so if you are one of the investors who would like to see more ESG options from Vanguard, please email : personalinvestors@vanguard.co.uk

I have lowered my expectations for future returns. The 9% or 10% nominal average from my portfolio over the past decade is unlikely to be repeated. I suspect the average could well be nearer to 5% or 6% and I am expecting more negative years as volatility increases.

Fund managers probably don't pay much attention to the likes of Extinction Rebellion, however when the Governor of the Bank of England, Mark Carney warns on the dangers of climate and says "take global warming seriously or you will lose money", it is language they understand. In a recent address to the City, he told them that companies that don't adjust to the realities of climate change will simply cease to exist.

The B of E is part of a global Network for Greening the Financial System who are collaborating on plans for the reallocation of capital on a massive scale to ensure we can meet the Paris Climate Agreement.

Around $1 out of every $4 of professionally managed investment in the US - a total of $12 trillion in assets -  is now invested in ESG or SRI funds according to CNBC and this has grown by 40% over the past 3 years.

According to a survey by UK Sustainable Investment & Finance, less than 1 in 5 fund managers believe oil companies will remain a good investment in 5 years time if still focussed on fossil fuels. Survey participants manage over £10 trillion and included HSBC, Schroders and UBS.

In 2018, Aviva assigned £1.8 bn of new investment into wind, solar, biomass and energy efficiency which takes the total invested in low carbon to £3 bn. In addition they hold a further £1.3 bn in green bonds to support the transition to a sustainable economy. They are committed to delivering on their responsibilities under the Paris Agreement and say :

"There is no greater collective risk we face today than tackling climate change. If we do not take urgent action to limit global temperature increases to within 2°C, the impacts upon the economy, society and our business will be nothing short of devastating. Aviva is determined to make its own contribution to tackling climate change. This is not at odds with business or investment. In fact, it is a business imperative".

The way we use money has a knock-on affects to the wider community. We can use it to support companies that are drilling in the Arctic for more oil reserves, or we can invest in companies which are installing wind turbines and solar panels. Governments can spend tax receipts on subsidies for home insulation or for airport expansion. Every decision, large or small, will impact on the environment and climate change.

Norway's sovereign wealth fund with assets of £1 bn recently decided to divest away from 134 oil/gas companies in its portfolio as they now regard them as risky assets. For the time being, they will retain holdings in Shell and BP but this could signal the thin end of a very large wedge. Large companies which fail to comply with the Paris Agreement face increasing risk of divestment from the growing impact and ESG funds. In addition, these companies will face big litigation cases for damage resulting from their activities.

I think it's becoming clear to many that companies which damage the environment will be increasingly marginalised as the financial community responds to concerns about climate. Sustainable and ethically sound investing which respects the environment will become the norm - possibly more quickly than many people imagine. Investors will still want a return on their investments but equally, they want a planet that is clean and healthy which they can enjoy in their retirement and will remain so for their children down the line.

Conclusion

Of all the 450 articles I've posted over the past 6 years, I feel this is by far the most important. However I am merely scratching the surface of this subject and it will be interesting to see how the story unfolds. 

I am obviously concerned for our future as I have children and five young grandchildren under the age of 10. However, I see the tide is turning and that people in positions of power seem to get the message and that's encouraging. I remain optimistic that we can rise to the challenges ahead. I am sure that as the catastrophic consequences of 'business as usual' become clearer to more and more people, they will change their lifestyles and demand action from politicians, policy makers and businesses...and maybe fund managers!

We are now entering uncharted territory - global temperatures are rising rapidly, atmospheric CO2 levels are off the chart and life as we know it is under threat as never before - and yet many are addicted to their modern lifestyles and refuse to heed the warnings. It seems we have a few years to make some fundamental changes - maybe 10 or 15 - but certainly no time to waste like the last three years bickering about Brexit.

In a recent documentary 'Climate Change : The Facts', Sir David Attenborough said

" While Earth has survived radical climactic changes and regenerated following mass extinctions, it's not the destruction of Earth that we are facing, it's the destruction of our familiar, natural world and our uniquely rich human culture."

This is a climate emergency. The UK, Scottish and Welsh governments as well as many local authorities throughout the UK have recently declared such an emergency. Rising GHG emissions do not respect the boundaries of individual countries - it's a global problem. We need a system change and a green new deal on a global scale to tackle the threats confronting us all.

The world will not end in 2030, but if we don't make some serious inroads to reducing global emissions over the coming decade, the job will be a legacy for future generations and the problems facing them will be far more intense and difficult to manage. To my way of thinking, it just makes sense to stop putting off the difficult decisions and just get on with what we know needs to be done.

Plant more trees and stop destroying rainforests; move to a largely plant based diet; leave fossil fuels in the ground and build more renewable capacity; appoint a minister for Climate Change and also put this subject on the national school curriculum. These and other measures are not exactly rocket science.

We have caused the problem and we now need to get it sorted as a matter of urgency...more and more rational people understand it's simply the right thing to do.

Do you have any thoughts on this subject? Are we already doing enough or should we be moving things along with more urgency? How will your finances be affected? Have you taken any steps to climate-proof your portfolio? Maybe you think it's all a big fuss about nothing. Leave a comment below, share your views with others.