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!


  1. Thoughtful analysis!
    I don't necessarily share your conviction about the end of fossil fuels (been hearing it for decades), but I don't dismiss it either.

    What to do? I decided, some time ago, to let the 'experts' help. Instead of passive funds, I commit some of my money to actively managed Investment Trusts.
    My reasoning is that the chaps who run these ITs spend all day every day thinking about just such problems as you highlight in this article. Should they invest in Fossil fuels? Renewables? High Tech? Biotech? Infrastructure? Healthcare? etc..
    I don't feel I can be up to speed in all these areas (particularly when I feel subject to such biased reporting from the BBC and other mainstream media) - but maybe they can!

    Hence I look to ITs such as Scottish Mortgage, who have the ability to drop Oil Companies when they no longer perform, and add renewables if they ever perform... Passive funds are obviously much more restricted in what they can invest in.


    1. Thanks steveal. I am hopeful that I will soon see signs of active fund managers responding to this issue. In fact, I did notice that Capital Gearing trust recently added a couple of UK renewable energy trusts to their portfolio.

      I am sure Anderson and Slater at Scottish Mortgage will be up to speed with the changes likely to flow from climate change so I will await their next annual report. BTW, they currently don't hold any oil/gas in the portfolio - mainly technology, consumer services and health/biotech.

      On the passive front, I guess it may not be long before we see a climate-friendly index launched??

  2. I think I'm moving one level further away than you.
    I'm not waiting for specific climate-friendly funds. I'm happy for Anderson and Slater to decide when climate-friendly businesses are worthy of an investment.

    It seems I'm less convinced by the climate story than you. However, I want to be involved in the situation if it does become a serious proposition.

  3. A most interesting read, and one that chimes with my own outlook regarding the relationship between investing and climate change. Thank you so much for your insights.

    From a personal perspective, tackling the major culprits of environmental damage involves a three pronged strategy.
    Selecting several genuine SRI products as part of your pf, as you yourself have begun doing, is a significant step. There are an increasing number of these funds out there. I'm currently holding INRG, a global clean energy ETF, and UKW, an IT focusing on UK wind power, and am considering another similar 'alternative' IT, TRIG, for its reasonable annual dividend.
    Proactively divesting away from funds that hold a stake in the usual suspect multinationals is also really important. I too dropped CTY recently.
    And thirdly writing to fund managers to raise awareness and eke out responses can also prove effective. Just announcing you're considering withdrawing your investment in one of their funds because it holds a stake in 'big oil', or simply asking what they're doing to challenge the policies of some of these companies, will ring alarm bells. And of course the more people that actually do this the louder those bells will sound.

    Please keep up the great work. It's very encouraging to know there are similar minded folk out there.

    1. Thanks.

      I will take a look at the clean energy ETF. The ticker rings a bell so I may have considered it at some point.

      So far as renewable energy infrastructure, I placed an order this week to purchase the FP Foresight UK Infrastructure fund which holds many of the trusts, including the ones you mention. I will post an article in the next few days.

      Yes, I did email Job Curtis at CTY and he replied to say he could not respond to individual investors but says he noted my comments. Of course, the more people that express their concern, the more these fund managers will take note. I hope they also take note of the demonstrations by young people 'strike4climate'!

      The campaign was started by Greta Thunberg last September and is now a global movement for action. I have put a clip of her address to the IPCC summit in the side bar - inspirational. Twitter : @GretaThunberg

  4. Hi there. Weenie referred me to your blog - it's great to come across a like-minded investor (although I am very much a novice and have a lot to learn!) I'm invested in LS80 and looking at the main holdings did make me feel quite uncomfortable as someone with strong ethical values. I'm also looking to pivot my investments towards green and ethical options. I see you've already got a lot of relevant info on your blog about this, so I'm thankful for the info you've put together so far.

    1. Mindy,

      Thanks. Appreciate your efforts and love the recent article. Stay true to yourself and your values and you cannot go far wrong in life! I will follow your investing journey with interest - good luck!

  5. I applaud your research and investing convictions. However some conclusions you arrive at may be somewhat flawed.
    1) The 'Green New Deal' has climate change as only one element. It is too broad an endeavor to gain much traction. A better play would've been to select one or two of the contained issues to focus on.
    2) The PG&E bankruptcy filing had 'probable' equipment malfunction as a cause of the deadly forest fire. Climate change was not listed as a factor, although I would suspect it was a contributor. The article referenced was an editorial (opinion) - not necessarily a factual piece.
    3) To take asset managers to task is misguided, I believe. Their growth is largely due to the rise in passive investing (ETFs). Although they are listed as 'registered owners' it is on behalf of 'beneficial owners', i.e., the vast majority of individual investors with ETFs in their portfolio.

    The quandary I encounter in my research are undefined secondary impacts. One example being solar. A by-product of manufacturing is silicon tetra-chloride. Therefore, is solar really green?

    1. Thanks for your observations Charlie. I may be misguided but I would err on the side of caution with fossil fuel investments. You may have read about the decision by the worlds largest sovereign wealth fund to divest out of 134 of its oil exploration holdings
      The writing is clearly on the wall for everyone to see (or ignore).