Saturday, 17 November 2018

Investing for a Green Future - Part 2

In the first part of this investigation I took a look at some of the options available from the Investment Trust sector. This second part will cover funds or OEICs.

Some funds focus on 'green' themes such as renewables and clean energy whilst others will adopt a much wider perspective. They are very much a mixed bag and range between light and dark green. Some will screen out the big polluters such as the major oil companies and airlines whereas others will adopt a more pragmatic approach by holding those companies which are questionable but which are deemed best in class or are attempting to move to a more sustainable model.

Most funds will be predominantly equity based which can be a problem for those who are more risk averse and prefer a balance between equities and bonds or property.

I remain sceptical about this sector because it looks to me like it would be very easy for some of these fund houses to set up a new fund with the name 'sustainable' in the title and tweak an existing fund by adding a few companies to the portfolio which are genuinely doing the business. This is called 'greenwash' and is obviously a deception to be avoided as such funds are merely riding on the growing wave of demand for socially responsible investments from consumers.


Currently environmental, social and corporate governance (ESG) is flavour of the month. Every group will be wanting to demonstrate they care about ethical issues but the reality is that it is marginal to what they are all about. They are paying lip service to sustainable solutions without delivering any meaningful changes to their basic philosophy and business models.

Simply having the word 'ethical' or 'sustainable' in the title of a fund does not make it green. To enable DIY investors to make an informed decision, funds need to become more transparent. Last October, financial advice firm Castlefield published a 'winners' and 'spinners' report (pdf) to cast a little more light on this area.


Commenting on the industry, Rob Lake of Authentic Investor

"People do this work – and I include myself here – because they care deeply about sustainability; because of our values. The world has built an economy and an investment system that separate ‘values’ from ‘value’. They give insufficient financial value to many of the things that as individuals we value the most: a healthy environment, social justice, fairness. Climate change, inequality, the financial crisis – all are failures to align value with widely shared values". [Why We Need Authentic and Moral Investors 2017]

Also a recent update from Simon Webber, Fund Manager, Schroder's
“As an active investor, this whole issue and area is incredibly interesting and powerful, because the markets are very good at assimilating short-term information and very bad at long timeframes and discontinuities.
If we’re going to get to the middle of this century with a 70% to 90% cut in greenhouse gas emissions, it is a complete transformation in the architecture of our energy industry, as well as automotive transportation, agriculture, heavy industry and chemicals and numerous other sectors.
As investors we need to be thinking through how these industries may change in structure: which companies are positioned for that, which are not.
Some companies will just focus on maximising their short-term profits. They won’t think about investing for five to ten years down the line, whether that’s so they have a license to operate, or whether it’s for technology that their customers are going to want. These short-sighted companies will see their business start to shrink.
For active managers, there is a wealth of opportunity for us from being part of that solution. In my experience, having run a climate change-focused strategy for 10 years now, I am constantly amazed at how markets, investors, analysts, and company management teams struggle with the scope of the change that is likely coming. Therefore, there is a big role for investors and active managers to support those companies that can help us move in the right direction.”

Make a Start

So, where do we start? One good place is the Ethical Consumer guide to investment funds

They have used 3D to rank the funds according to a range of criteria.


Morningstar is another site which can be used to narrow down the options - in this case by searching for 'Equity Ecology' funds. They also have a 'Guide to Sustainable Investing' page with some useful links

Here are a just few funds I have looked at from over 120 available on Trustnet under 'Ethical/Sustainable' filter. To be honest, I am really not convinced that these funds, with a few exceptions, are moving the green/sustainable needle very far. They are certainly not recommendations and readers should carry out their own research.

Legal & General have recently launched their Future World Equity Index fund which has OCF 0.30% and seeks to avoid those companies with a worse than average carbon emission or fossil fuels and favour those that operate in a low carbon sector. However, I note it has oil giants Shell and Exxon as top five holdings!

Anton Eser, CIO at LGIM, said: "We are on the path to a low-carbon economy and companies that fail to respond to this reality present a risk to investors' portfolios. This fund not only aims to help investors navigate these long-term risks, but also provides the opportunity to take advantage of the benefits yielded by the transition."

VT Gravis Clean Energy fund was launched in December 2017 and invests in a portfolio of global companies including investment trusts which focus on the construction, supply and generation of green electricity such as wind and solar. Many of the ITs featured in part 1 are included in the UK weighting of this fund. It pays a dividend of ~4.5%.

Baillie Gifford offer their Positive Change fund which I recently added to my portfolio.

Kames Global Sustainable Equity fund was launched in 2016 to compliment their existing ethical fund. In the 2.5 years since launch, it has returned 36% and has OCF of 0.9%. The alternative Ethical Fund has lower OCF 0.75% and offers a mix of equities (max 60%), bonds and cash and has a UK focus.

Royal London offer 3 sustainable funds - World, Diversified and Managed Growth - which were the subject of my article in March 2018

FP WHEB Sustainability holds a range of eco-sensitive holdings providing some of the solutions to climate change. Themes include resource efficiency, clean energy, sustainable transport, health and water management. This fund scored well on the Ethical Consumer rankings so is worthy of further consideration.

Janus Henderson offers its Global Sustainable fund (previously Global Care fund) launched in 1991 and has OCF of 0.84%.

BMO (formerly F&C) Responsible Global Equity invests in a diverse range of ethically screened spread of global equities. It has been around in one form or another since 1987 and has OCF of 0.82%. Top holdings include Apple, Mastercard, Amazon, Prudential and Union Pacific Corpn.

Liontrust Sustainable Future Global Growth invests in a range of global companies which fit their sustainable criteria. The OCF is 0.93%. Lead manager Peter Michaelis was previously head of SRI at Aviva Investors.

Pictet Clean Energy is a global fund which holds at least two thirds of its portfolio in companies that contribute to and benefit from the switch to low carbon energy souces. OCF is 1.23%.

Schroder Global Climate Change fund was established in 2007 and adopts a broad thematic approach investing in those global companies which are most likely to form part of the solution to the threats of climate change. It has OCF of 0.82%

Jupiter Ecology fund was one of the first fund of its kind to be launched in the UK in 1988 and has been managed by Charlie Thomas since 2003. The globally diverse fund has a focus on companies providing solutions to environmental and social issues. The OCF is 0.78%. The fund however does not seem to have a good long term performance record compared to its benchmark.

Conclusion

So, just a small sample of funds that caught my attention whilst trawling through the many options now available to the DIY investor.

Whether we accept the science or not, the investing landscape is changing almost as rapidly as the weather and investors, whether DIY individuals or professional, need to be aware of the changes in public opinion.


We have seen on our TV news over the past week the devastation, destruction and loss of many lives caused by wildfires in California. They have been the worst in living memory and most put the causes down to global warming. This is not something to contemplate for the future - fundamental changes are happening right now.

Climate change will most likely be the main driver of policy changes and regulation which will fundamentally alter the way we live, work and make plans for the future. It will have a huge impact on the investing landscape.

In the next instalment I will take a look at what is on offer from the world of ETFs and other more specialist or niche providers.

Feel free to comment below if you hold any green or ethical funds in your portfolio.

Saturday, 10 November 2018

Your Money Matters - New Book for Schools


DIY Investor is all in favour of financial education so just a short post to promote a new book for schools funded by Martin Lewis of Money Saving Expert. The book 'Your Money Matters' is a financial textbook produced by Young Money. All 3,400 state-funded secondary schools will receive 100 free copies which is aimed at students aged 15 & 16.


A free download is available for anyone interested and it will shortly be available to purchase on Amazon.

Here's an article on the MSE website (includes link to download book).

Thursday, 1 November 2018

Investing for a Green Future - Part 1


Over the past few weeks I have been looking into the options to invest some of my portfolio into green funds which are more likely to do good rather than harm when it comes to addressing climate change.

I have been persuaded for some considerable time on the need to act in a responsible way and try to maintain a fairly low-impact lifestyle. However, one area that I could do more is with my portfolio so I would now like to bring my investments more into line with the rest of my lifestyle as I feel increasingly uncomfortable with the fact that business as usual is not going to get the job done.

I guess that when we become aware of a threat we realistically have three options - run away, ignore or face head on. With the life changing consequences from run-away climate change, the first two will result in changes that we can hardly imagine so the third choice is the only realistic option on the table...surely this is much clearer than Brexit!

Personally, I think we will require a paradigm shift in the way we organise our global economy and our global communities. That will take a little time to bring about so, in the meantime, and in the capitalist system we all operate within, I will try to take a look at a few of the options available to me.


In part 1, I will look at investment trusts as there are not so many choices to cover and will then go on to look at the wider landscape of funds and then ETFs.

Investment Trusts

For this section, I looked at the ITs listed by the AIC. The 'green' trusts fall into two broad categories - Infrastructure & Renewable Energy which includes specialist trusts which invest in the production of renewable energy such as wind, solar etc.; and secondly environmental trusts which invest in a range of companies which produce goods or services beneficial to the environment.

a Infrastructure


Many of the trusts investing in wind and solar have become popular with small investors due to their above-average yield. They were supported by the governments generous subsidy schemes however last year it withdrew its Renewables Obligation Certificate (ROCs) in respect of new operations and this has created a problem for the trusts and investors will want clarification on options for future growth.

The ROCs are awarded for a period of 20 years so existing schemes will have some visibility for some time to come however some managers are looking to diversify in overseas markets. For example NextEnergy Solar (NESF) and Foresight Solar (FSFL) have both expanded their operations to include Europe, Australia and USA.

Other trusts in this sector include Greencoat UK Wind (UKW), the largest in the sector with assets of £1.6bn but currently trading on a hefty 15% premium to net assets. 

Then we have Bluefield Solar Income (BSIF), much smaller in size but also on a hefty premium. It operates one of the largest solar energy operations in the UK. Here's a link to a nice write up from IT Investor for anyone interested.

With a similar size we have John Laing Environmental (JLEN) which predominantly invests in onshore wind. However it has diversified into anaerobic digestion with a plant near my home town of Doncaster. 


A different angle is provided by Gore Street Energy Storage (GSF) launched in May 2018 which is focussed on battery storage technology with projects in mainly UK but also Europe and USA. Renewables such as wind and solar are intermittent and as other traditional streams reduce, battery storage will increasingly be needed to provide stability for the network.


The larger trust Renewables Infrastructure (TRIG) with assets of £1.2bn has also expanded into battery storage with a 20MW project in Scotland which was opened in September. It has a four year contract with National Grid to provide two-way balancing service which provides additional flexibility and should support greater levels of renewable energy projects and avoid new grid infrastructure.

There are currently 8 trusts in this sector.

b Environmental

There are just 3 trust currently - Impax Environmental Markets (IEM) is by far the largest with assets of £500m and which I have recently added to my portfolio.

The others are Jupiter Green (JGC) and Menhaden Capital (MHN) which is run by Ben Goldsmith (brother of Tory MP Zac and Jemima Khan). The trust has not done well since launch having lost 28% for investors which include Dragon's Den Deborah Meadon and currently trades at a huge 22% discount.

In Part 2, I will cover some options from the universe of OEICs

Feel free to comment below if you hold any green funds in your portfolio and how they have performed over recent months/years.

Monday, 29 October 2018

Autumn Budget 2018

(as it's national cat day)
The first Monday budget for almost 60 years...surely some momentous announcements to be made...actually, no...seems to be business as usual.

Given the well-documented tensions between the PM and her Chancellor - many say she would have replaced him after last years election had she got the result she wanted rather than losing her majority. Although he thinks otherwise, I suspect this could well be his last.

At the conference last month the PM announced the end of austerity and in June, additional spending on the NHS so will this mean the abandoning of the battle to reduce out £1.8 trillion debt mountain?

Debt

Our borrowing is still not under control and whilst we are borrowing less than previous years, the total amount owed is still increasing. Net PSBR now stands at £1.8 trillion which is almost 4x the figure for 2007 (~£500bn). Admittedly the annual deficit has been gradually coming down year on year since 2009 when we borrowed £152bn but the fact remains we continue to borrow each year - estimates for this year are £26bn. We are paying around £45 billion each year in debt interest which is ~£1 for every £8 we spend.

The more we borrow, the more we pay in interest which is linked to inflation rates and this means less to spend on welfare, pensions and essential public services, housing and infrastructure. At some point we have to grasp the nettle and start to live within our means.

Budget

Public borrowing was £11.6bn less than forecast which has provided the Chancellor with a little more freedom on spending which includes an extra £2bn on mental health services, £1bn for the armed forces and an extra £1bn for the transition to universal welfare together with an increase in the work allowance.

The OBR confirmed that debt peaked at 86.5 % of GDP in 2017-18 the highest it has been in 50 years.

On Brexit, the government have set aside a further £500m of new money to cover some of the current uncertainties. The Chancellor proposes another budget if there is no deal...project fear mark 2...

On a positive note, I am pleased to see that pensions and savings seem to have been left alone.

The relevant changes are few :
After a big jump in 2017, the ISA limit for 2019-20 will remain unchanged at £20,000.
The lifetime allowance for pension savings will increase in line with CPI, rising to £1,055,000 for 2019-20. 
From next April, personal allowances will increase from £11,850 to £12,500 (up 5.5% well ahead of inflation) and HR tax allowance up 7.8% to £50,000.

Climate Change

So we had the IPCC report in early October warning of severe consequences for our way of living unless we make some fundamental changes to limit global warming. An opportunity for the Chancellor to put forward some radical proposals to demonstrate the UK is serious about this issue.

He could restore grants for basic home insulation, reverse the decision to reduce subsidies for electric vehicles, stop postponing the increases in fuel duty for petrol/diesel, commit to getting back on track in meeting its climate targets, reverse the decision to slash feed-in tariffs on domestic solar energy installations, bring in the phasing out of new petrol/diesel cars much sooner than 2040.



He may have mislaid a few pages of his notes as there was very little mention of the environment... some talk of plastics recycling and a tax on imported plastic packaging with less than 30% recycled plastic to be introduced in 2022. No plans to introduce a levy on disposable coffee cups. A £60m tree-planting scheme (contrast £420m for potholes) and £10m for cleaning abandoned waste sites. A suggestion there may be further measures in the small print of the 'red book' and that's about it.

Alas, a miserable 'green' effort from the man in the grey suit and very little of any real consequence which is a dereliction of our responsibility to provide a cleaner environment for our children and the generations to follow.

This was the conclusion of my recent post on climate change

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.

The Chancellor has been under pressure from many quarters in recent months and the relationship with the PM is strained. I suspect his time is almost up and maybe for this government also.

What do you make of it all? Were there any benefits for you? Feel free to leave a comment below.