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!