Sunday, 25 November 2018

Another Fine Mess Olly!

[Warning...this is a lengthy article about Brexit and the withdrawal agreement. It is not about investing so please feel free to click on to your next site if you are fed up of Brexit].

The EU heads gathered today to sign off on the proposed Brexit deal hammered out over the past two years. All I would say is the whole process has become an omni-shambles of the highest order.

It got off to a promising start when Mrs May gave her LancasterHouse speech which set out the Governments priorities for the Brexit negotiations

The objectives were clear and well received - take back control of our laws, controls over immigration and an end to freedom of movement, leave the single market, freedom to strike our own trade deals and a smooth and orderly transition which would entail a broad agreement on our future partnership by the end of March 2019.

This was January 2017 and it seems it has been downhill since then.

Civil Servants

(I've printed this image on my helps a little)
Of course, much of the day to day negotiations have been conducted by our civil servants. Mrs May appointed Olly Robbins as her chief negotiator. At the start he was head of DExEU but later transferred over to the Cabinet Office to work more closely with the PM. Robbins was well known to the PM as he was a senior civil servant in charge of immigration when Mrs May was at the Home Office. Robbins is her closest confidante on Brexit and the person she most relies upon so he enjoys the most powerful position.

Of course he is supposed to be politically neutral but he was president of the Oxford Reform Club which promotes a federal European Union and is therefore a committed Europhile which puts into question just how impartial he could be in the role of negotiations to leave.

He has been assisted by Sir Tim Barrow who took over following the resignation of Sir Ivan Rogers who accused the government of muddled thinking

For the EU, Sabine Wayand has done much of the hard work as deputy to Michel Barnier. She has 25 years experience in trade negotiations and is well acquainted with the UK having studied at Cambridge in the 1980s

Some people suggest the civil servants led by arch remainer Robbins have been working hard to stitch up the Brexit process by skillful manipulation to end up with a last minute 'deal' which is being sold as delivering what we voted for but in reality will mean very little changes. To some it appears that Robbins has been gradually softening up the PM by willingly accepting the EU lines and persuading Mrs May we have little alternative. Of course he would be pushing lines upon which another remainer would not need much persuading.

The NI Backstop

One of the biggest obstacles to progress has been finding a solution on how to avoid customs checks and a hard border between Ireland which will remain in the EU. Obviously whilst the UK has been a member it has not been a problem but now we are proposing to leave the customs union and single market, the two parts of Ireland could have different taxes, tariffs and regulations which would need to be checked at the border.

In 2017, in order to make some progress, both sides agreed to the backstop which means if no solution can be agreed during the future trade negotiations after we leave, then NI would remain in the EU customs union and parts of the single market and would therefore be treated very differently to the rest of the UK. 

Scotland who wish to remain in the EU could argue that if it applies to NI why not them? This could be very damaging for the unity of the UK. Obviously the DUP are opposed to any measures which treat NI differently and their leader says they will  vote against the current deal.

The WA if accepted, would invoke the NI Backstop Protocol which runs to 175 pages (of the 585) and basically ensures that if no agreement is reached during the transition period (or two year extension), then the whole UK stays in the EU customs union and subjects NI to a raft of single market directives and regulations. If it comes into play we have no way to exit without the consent of the EU so they have a veto. President Macron has indicated he will use the threat of the backstop to get a good deal on fishing and other countries will use this leverage to get what they want in the future negotiations.

We are effectively prevented from striking trade deals around the world whilst the EU hold all the aces in the future trade negotiations knowing that if we do not agree, they maintain access to the UK markets whist keeping us tied to the EU.
We could end up being locked in for many years to come.

The future relationship document (not legally binding) offers warm assurances that both sides are 'determined to replace the backstop' but I fear the EU would say anything to get the WA agreement in place.

The Withdrawal Agreement

On 15th November after much speculation that it was getting too late to reach an agreement...ta daa...the final draft of the WA is presented to No 10 and there is an emergency cabinet meeting called to ensure they are all on board. Bear in mind this is a document stretching to 585 pages of complex legalese text equivalent to reading 'War & Peace'. Ordinary people are not intended to read these documents. I am sure this was intended - keep it complex and deliver at very last minute...

The important point is that if we accept it then we have no way out...we will be stuck with it unless the EU agree to a replacement agreement...there will be no get out clause or cooling off period.

The basic proposals include hand over the £39bn to cover the transition period to end 2020 which may be extended to 2022 without knowing what, if any, trade arrangements will be agreed. Stay in custom union until new agreement on trade is reached failing which we enter the 'backstop' arrangement which ties us into the CU indefinitely unless a 'joint committee' sets us free. Being in a customs union means we continue to pay the EU an additional £30bn for the extra two years and also prevents us from striking our independent trade deals with non-EU countries

NI would be treated differently to the rest of the UK and would be more closely aligned to Dublin rather than London.

The ECJ has jurisdiction over the withdrawal agreement including transition period(s), the potentially permanent backstop arrangement as well as the financial settlement

The deal would undermine and seriously compromise the integrity and sovereignty of the UK and is a far cry from what was set out at Lancaster House. If the Commons vote for the deal, it will bind us to the EU for an indeterminate period, will remove any independent control and hand it to a 'Joint Committee' who have exclusive jurisdiction to implement all aspects of the WA for up to four years after the end of the implementation period and settle any disputes. Any unresolved matters can only be resolved by the ECJ. This JC will alone decide on any extension to the transition period.

Our PM talks about taking back control of our laws and sovereignty...dream on!

The Future Agreement

First question...why has it taken over 2 years to thrash out the WA and just a week to sort out the future relationship?

It looks like all our obligations, including payment of £39bn and probably a further £30bn due if we enter an extended transition, are nailed down in the 585 page legally enforceable WA whilst all the potential benefits of our future trading arrangements are set out in this 26 page framework document... which is not binding and has no legal standing whatsoever.

I cannot for the life of me understand why this part of the process has to be left until after we have left on 29th March. How on earth are we supposed to take a view on the withdrawal agreement before we actually have some degree of certainty what our future relationship will be like? This means our MPs are being asked to vote on a 'deal' with only the sketchiest of understandings of the future set out in this political declaration...which is not binding and the EU could easily backtrack on.

The PM must have agreed to go along with this arrangement at the outset so I guess she must take responsibility. This has to be a serious mistake but I have not read much commentary so far.

The framework is full of aspirational words and could be interpreted as giving every party some of what they require. It aims for a future agreement which balances rights and obligations. The more we want to maintain close ties with the EU, the more we will need to accept their rules and submit to the EU courts in the event of disputes.

Importantly, it contains a commitment from both sides to 'build and improve upon the single customs territory' provided for in the WA. This is not of course binding but the EU would have no moral duty to agree a trade deal which permits the UK freedom to pursue its independent trade policy with the rest of the world.

The aim is to start negotiations after we formally leave on 29th March 2019 and hopefully enter a formal agreement by the end of the transition period end 2020. We have the option to extend the transition period by two years to end 2022 (which takes us after the next election in May 2022). If the future relationship is still not agreed then the backstop arrangements kick in which keep us in the CU and tied to the EU without the ability to unilaterally pull out.

This gives the EU a very clear advantage throughout the negotiations.

I think there is no doubt the establishment have deliberately set out to undermine the Brexit process and appear to have succeeded. Having a concerted fear campaign before the referendum vote in 2016 which most people treated with contempt, our Wesminster elite have ramped up the fear factor for no deal to maximum so our politicians are now facing a vote on whether to accept the deal presented by May & Robbins without any clear promises on the future trade agreement or reject the deal which may result in leaving on WTO rules.

To be honest, I would rather take my chances with a clean break and WTO rather than remaining tied to the EU with no say in future policies. The current deal offers the worst possible solution - legal obligation to pay £39bn, not out of the EU, continue to pay more in, split off NI, subjected to EU courts and unable to strike our own trade deals.

The establishment offered the people a vote and when it did not turn out the way they wanted, they have worked hard to find a way to keep the UK so closely aligned that it will feel no different to when we were still a member.


I am left wondering how we could possibly get things so wrong. What do we have after two and a half years? May and Robbins have led everyone along the proverbial garden path and here we are with no time left having to decide on a crap deal which pleases neither leave or remain supporters. For the EU it would be a tremendous outcome.

To be honest, I would not be surprised if Robbins deliberately made the deal so bad that nobody in their right mind could possibly accept it and calculated this would eventually result in a second referendum and the people voting to remain after all...far fetched possibly, but...

The big mistake was allowing a staunch europhile like Robbins to take charge of negotiations...that said, I guess there are probably not many top civil servants who voted leave...

This feels embarrasing and humiliating. We could have said to the EU after June 2016  'Look, we are leaving the EU however we really would like a free trade deal and we are sure you probably would too so lets see what can be agreed. If we cannot find agreement then we will arrange to leave on WTO rules'.  The basics could have been established in a couple of months.

I honestly cannot believe our MPs could vote this through...they have set aside 5 days for the debate culminating in the big vote on Tuesday 11th December. This is not so much a bad deal more an atrocious deal. The PM needs 318 votes to get it over the line - a significant number of her backbenchers say they will vote against, the DUP, Labour benches and SNP so my best guess is she will be at least 70 short.

If they vote down the deal, which surely they must do, the default position is that we leave on 29th March on WTO rules. However, they also want to avoid a no deal so they may consider another vote which is made conditional on the outcome of a referendum. Parliament could also ask the EU to postpone this date whilst we had another general election.

The proposed deal would be nothing short of capitulation and surely few people - whether remain or leave - believe Mrs May when she says we have delivered on Brexit, taken back control of our borders, our laws and money, free to negotiate our own trade deals around the world.

We have wasted the past 18 months getting to this point and, as I said in July following Chequers, I honestly cannot see a good outcome from where we are now. We are facing a political and constitutional crisis and our PM and her cabinet colleagues along with senior civil servants should hang their heads in shame (but of course they won't). There will no doubt be inevitable unintended consequences flowing from this betrayal from those in many parts of the country who will be left once again feeling alienated, let down and ignored.

This feels like the end of the beginning - it will run and run...aaagghhh...

Personally, I don't much care anymore - I probably should have known better but feel badly let down by our politicians and the way I am feeling at present, will not take part in future elections. It seems whoever you vote for, the political elites always have their way. It was probably ever thus....

I am sure if you have read this article you probably have a view so feel free to leave a comment below. Should we go along with the deal to bring the uncertainty to an end? What should happen if MPs vote against the deal?

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.


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.