Monday, 1 June 2020

TR Property Trust - Full Year Results

I hold this property trust in my ISA and I also my Sipp drawdown portfolio.

The fund is managed by Thames River and aims to maximise the 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 the 36% weighting in the UK, with France making up a further 13.5%, Sweden 9% and Germany 37%. Retail has been reduced and accounts for 15% of the portfolio (down from 22% in 2019) and office space 28%, with another 37% in residential and the remainder divided between industrials 23% and diversified such as storage, healthcare, supermarkets and student accommodation. 

The majority of the portfolio consists of UK and European shareholdings with a small allocation of 8% in UK direct property.

Results

The trust has recently published results for the full year to end March 2020 (link via Investegate). It was all going so well until mid February...the Covid-19 pandemic had a dramatic impact on the European property markets in March and as a result net assets fell by 20% in the matter of just 3 weeks with the share price down over 30%. Over the past year, net asset total return has decreased by 11.5% reversing most of the previous year's gain of 15.5%. The share price declined by -16.8% ... although it has recovered by 15% during the past month.

Commenting on the results, outgoing chairman Hugh Seaborn said:

"Looking back over the last decade, the Trust has delivered a share price total return of 171% and a NAV total return of 157% versus a benchmark figure of 97%. This performance compares well to the FTSE All Share total return of 53% and the STOXX Europe (in EUR) total return of 72%. Income remains a crucial element of property's total return and our dividend payments over the same 10 year period (and including the final dividend announced today) have recorded a compounded annual growth rate of 9.3%.

Rarely has any 12m reporting period been so dominated by the events of the last six weeks of the financial year...

The low costs of borrowing and skinny yields on fixed income will remain a feature of the financial landscape, increasing the value of income particularly where it is index-linked. This will support the attractiveness of property as an asset class although not necessarily protect it against market fluctuations caused by macro events that move global equity markets, such as that which we have witnessed in the closing weeks of this financial year".

The crisis caused several companies in which TR invests not to pay dividends as expected. The company said it expected earnings to fall in the current financial year but that it expected to use reserves to pay its own dividends. "The company has a healthy level of revenue reserves which have been accumulated over time to provide resilience in the event of a crisis. These are used to supplement short to medium term falls in earnings until such time as conditions settle..."

 
Share price past 12 months

Income

Revenues have increased slightly and as a result the final dividend will be increased to 8.8p (last year 8.6p) making a total of 14.0p for the year, an increase of 3.7% compared to the previous year (12.2p). It has produced compound annual dividend growth of 9.3% p.a. over the past 10 years and this has been fully covered by property revenues. The trust yields 3.8% at the current price of 365p.

So, Covid has impacted my holding in this company - having said that, the share price is still up 20% on my purchase price at the end of 2016 plus an additional 12% from dividends so mustn't grumble too much. I said last year that I was expecting a little volatility in the share price until the Brexit saga was resolved...but was unprepared for the coronavirus curve ball. However, the income seems fairly secure even if reserves may well be required over the coming year or two. 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!

Monday, 25 May 2020

The Future of UK Energy

I have a keen interest in all things relating to climate and energy so I was really interested to see this landmark report "Powering the Future" from industry body Renewable UK suggesting a 6-fold increase in onshore and offshore wind by 2050.

Here are extracts of some of the main areas covered:

The UK has set a legally binding target to reach net zero emissions by 2050. Any residual carbon emissions will need to be offset by carbon capture or large scale tree planting. 

The bedrock of this transition over the next 30 years will be a transforming of our energy system from its current centralised form to a low carbon, smart system which will be far more flexible and of course dominated by renewable forms of energy.

The Transition

We have just 10 years to put in place the systems and investment to prevent global temperatures rising above 1.5C or we risk an exponential increase in climate-related disasters. If replicated around the world, the policies needed for the UK to reach its target would give a better than evens chance of limiting the global warming to 1.5C.

Just a decade ago, coal was the backbone of our power generation but over the last 10 years it has been replaced by renewable energy from wind and solar. We have currently gone almost 7 weeks without any coal generation - a record. Renewables accounted for 37% of the UK mix in 2019 and for the first time ever, surpassed fossil fuel generation in the final quarter of the year.

The government operates clean power auctions (CfDs) which provides a stable framework for investment in large projects such as offshore windfarms. Developers such as Orsted have a 15 year visibility on future revenues supplied to the National Grid. This has helped to drive down costs for renewables and the CfD model is now widely adopted around the world. Onshore wind and solar PV are now the cheapest source of new electricity generation worldwide.

National Grid ESO are working on plans to operate a zero carbon electricity network by 2025. Smart and sustainable new markets will be essential for operating a carbon-free electricity system.

The new system will become more decentralised and where renewable and low-carbon technology dominates how we generate electricity, the way we travel and how we heat our homes.  New technology will enable significant distributed and local generation, supported by energy storage and demand-side solutions.  

Consumers will produce, store and sell energy in response to market signals, based on cost and carbon-intensity, through peer-to-peer trading, smart homes, and participation in our balancing and ancillary service markets advanced data and analytics change the way market participants interact with us and each other, and enable them to make more informed choices.

In the UK we are planning to increase offshore wind from 10GW to 40GW by 2030 and there is potential to increase this to over 90GW by 2050.

In addition to offshore, the Committee on Climate Change (CCC) recommend a greater deployment of onshore wind from currently 10GW to 35GW by 2035.
The CCC also suggest an increase in solar PV will be needed - to 40GW by 2030 from currently 13GW.

A diverse mix of clean energy is preferred and the UKs wave energy and tidal stream sector could provide a significant proportion of energy that is predictable and not dependent upon weather which makes it a good additional source of clean energy to compliment wind/solar.

Tapping into the Power of the Tidal Streams

Energy Storage

As the renewable sector grows, the ability to store energy from wind and solar when there is an excess and then use it later when demand is higher will be crucial to the future functioning of our grid. Storage covers many technologies such as batteries including EVs, compressed air, pumped hydro reservoirs and clean hydrogen. It will cover periods of peak demand as well as help to smooth the flow of energy throughout the system.


We currently have a system that can ask renewable wind/solar to close down when there is an excess of energy and low demand...which seems a bit crazy to me and needs to be resolved. Combining renewable generation with storage such as battery or hydrogen will allow operators to divert supply from the grid and time-shift the power output release. Wind and solar farms which benefit from the ability to maximise returns during higher price periods.


Green hydrogen made from the electrolysis of water using power from wind or solar can contribute to the demand in winter for both heat and power. Currently there are trials underway to mix hydrogen with traditional gas and use the existing gas pipe infrastructure. Hydrogen could well be the key to unlocking the transition to net zero emissions.


Of course, smart charging in the smart homes of the future will be a big way of storing energy. With the increasing roll-out of electric vehicles, it will be possible to charge millions of EV batteries overnight with cheap renewable energy from wind and then use this aggregated stored energy to smooth supply across a local energy network the following day. Work is already underway to lay the foundations for this smart energy system. As the volume of EVs and renewable capacity increases, there is a wide range of emerging technologies to support low cost integration. 

Currently the majority of the storage pipeline is battery. There is around 10GW either built or planned. Most are located at gas plants to take advantage of existing grid connections but increasingly there are new solar+battery projects and a growing interest in onshore wind+battery now it is free to take part in CfD auctions. According to National Grid ESO, storage capacity could increase to 23GW by 2050

New Models

The current model is based on centralised generation and passive consumers. As we transition to the new model based on low carbon renewables, we will need a new system which is more flexible, more decentralised and a need for more active participation.


In the energy world of the future, the problems will arise not from too much renewable energy but from a lack of flexibility in the system to match supply and demand and provide the transparency to provide real benefits to consumers.


They Could Pay You...!
We therefore need the roll out of smart meters to be stepped up and more smart tariffs introduced along the lines of the trials offered by Octopus Agile where lower energy prices are available during periods of low wholesale prices. This resulted in consumers shifting consumption away from peak periods by 28% and for EV drivers by 47%. Time-of-use tariffs will help to unlock the decarbonisation of our economy and help to balance demand and supply and "flatten the curve"...now where have I heard that before!

The national roll-out of smart meters will facilitate the introduction of new flexible tariffs where consumers can use more cheap electricity at times when the wind is blowing or sun shining.

Conclusion

We are already building the energy systems for the future. Low-cost heat pumps, a charging network for electric vehicles, renewable green hydrogen. The UKs net zero target by 2050 will be renewables-led providing clean, cheap power to a wide range of consumers. Renewable electricity, both directly and indirectly through the production of green hydrogen, will meet up to 75% of our energy needs. What is needed now is a stable market with long-term incentives in place to support the companies and investors who will deliver it.


For some time now I have been thinking about the big changes taking place around our energy system - both here in the UK and more widely - and then backing up some of this by investing into those areas which are likely to benefit. Of course there are never any guarantees but I have been building my 'green' portfolio with a range of investments which are likely to benefit from the transition to clean energy. So, a mix of renewable energy infrastructure trusts such as TRIG and UK Wind, the big global players such as Orsted and Vestas Wind and some smaller green hydrogen plays such as ITM Power and Ceres.

I am mindful of the wisdom of Lars Kroijer and his persuasive argument in favour of index investing in his book "InvestingDemystified". It is based on the premise that the average investor does not have an edge or advantage that will help him/her to beat the market. 

As someone who has now rejected the global index to avoid fossil fuel companies and the big banks which finance them, it will be interesting to see whether this understanding of climate-related issues proves to be an advantage over the longer term.

As ever, this article is merely a record of my personal thoughts and how I see the future developing and should not be regarded as an endorsement - always DYOR!

Tuesday, 19 May 2020

Troy Trojan Ethical - Portfolio Addition

It's been a very bumpy ride for investors these past few months and in April I decided to move to a more defensive mode and replace some of the bonds I had lost when selling my multi-asset global index funds.

I recently added Personal Assets Trust to my portfolio with a view to preservation of capital during this uncertain period. Troy have been advisers to the Trust since 2009 and have now taken over the management following the recent retirement of long-term managers Robin Angus and Hamish Buchan.

One of the good things I really like about the set-up with PNL is that it is specifically run for it's investors and responsive to their feedback and contributions. I therefore emailed the company regarding my concerns about the tobacco holdings in the portfolio. From this exchange I was advised that Troy have recently established a more ethical fund which is run on very similar lines to PNL and has the same ethos of capital preservation but excludes tobacco whilst retaining most of the other equity holdings.


The Trojan Ethical fund is managed by Charlotte Yonge who has been at Troy since 2013 and is also assistant manager of their £4.6bn Troy Trojan fund. The fund exclusions are alcohol, arms, fossil fuels, gambling, high-interest loan companies, pornography and tobacco. The fund will only invest in securities issued by the G7 countries - UK, USA, Japan, Canada, France, Germany and Italy.


Whilst it's good to exclude these sectors, I think it would be a good idea if these ethical fund managers started to include - or at least add greater weighting - those companies which were making a positive contribution to society and the environment. Here I am thinking of the likes of renewable energy companies like Orsted and Vestas Wind or those operating in areas such as clean water or green hydrogen. I suspect that following the current pandemic, more investors will be thinking seriously about where their pensions and ISAs are invested. I suspect a lot of people, especially younger investors, would prefer their money to be invested in ways which create a more fair and positive society as well as a more sustainable environment.


Performance

Similar to the conservative style of Lyon's Trojan fund which has delivered a total return of 30.8% (average 5.5% p.a.) over the past 5 years - well ahead of the FTSE All Share 1.9% (average 0.4% p.a.) - this multi-asset fund is defensively positioned with an emphasis on preserving capital and low volatility which is just what I require in the current climate.

5 Yr Performance Troy Trojan v FTSE All Share Index


Trojan Ethical 3m Performance v FTSE All Share Index (blue line)
(click to enlarge)

According to the latest factsheet to end April, the total return has been 10.8% over the past 12 months compared to -16.7 for the FTSE All Share Index - it's early days for this fund but clearly off to a good start in these turbulent times! The current allocation is similar to PNL with 45% equities, 35% govt. bonds, 12% gold and 8% cash.

Top equities include Microsoft, Google, Nestle, Medtronic, Visa, Unilever, Colgate Palmolive and Warren Buffett's Berkshire Hathaway. Unfortunately I have not been able to locate a full list of holdings for this fund.

I have compared the holdings with Personal Assets:



I have purchased the 'X' version which has slightly lower charges of 0.87% compared to the 'O' version. The fund was added to my portfolio earlier this week at the price of 105p.

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!

Tuesday, 5 May 2020

Personal Assets Trust - Portfolio Addition

The markets have been kind to the small investor these past few years. I have been lucky and managed an average return from my portfolio of 8% per year for the past decade. However, the mood has suddenly turned darker and I am looking to lock in some of those gains. I have now added a few government bonds to my portfolio but I recently had another look at an old favourite Personal Assets Trust (PNL).

This is one of the trusts designed to preserve capital and so is loaded with defensive assets such as government bonds and large, globally diverse equities. The trust joined my portfolio back in 2013 at a purchase price £343 but was sold the following year as I needed a higher income yield during the period between taking early retirement and state pension.

It is listed in the 'Flexible' sector on the AIC website and other similar trusts include RIT Capital, Ruffer and one of my former holdings, Capital Gearing.

Its stated aim is to protect and increase (in that order) the value of shareholders' funds over the long term.

In 2009 PNL engaged Sebastian Lyon as its adviser. He runs Troy Asset Management which he established in 2000 primarily to manage the affairs of the late Lord Weinstock and from whom he inherited his conservative style of investing and focus on wealth preservation. Troy have now been appointed as manager from this month.

Performance

Personal Assets Trust is unique with its commitment to the protection of shareholder wealth combined with its definition of ‘risk’ - PNLs definition is focussed on the ‘risk of losing money’ as opposed to most other trusts where risk is defined as volatility of returns relative to a benchmark index.

Personal Assets v FTSE A/S Index YTD
(click to enlarge)
Personal Assets' investment style tends to outperform in falling markets and lag in sharply rising ones. This is certainly the case for the current market turmoil.
Over the past 10 years the trust's share price total return has been 5.7% p.a compared to around 5% p.a for the FTSE All-Share index.
Commenting on the current crisis Seb Lyon says
"...the pandemic has exposed inherent fragilities in our economic system. Our view is that this crisis will be a prolonged and drawn out process. We consider the suspension of economic activity across the globe will result in the deepest downturn since the 1930s with few businesses unaffected."
Holdings

According to the latest quarterly report, equities make up around 44% of the portfolio - largely USA and UK. The manager favours large, well-financed companies which have stable demand and low debt... preferably net cash. UK-listed holdings include Unilever, Diageo and BATS. In the US there are Coca-Cola, Microsoft, Google, Procter & Gamble and Berkshire Hathaway. Gold accounts 10% of the portfolio and the remainder consists of assorted government bonds - mainly US TIPS -  so fairly defensive!

Over the past year the manager has sold GlaxoSmithKline and Imperial Oil and reduced Coca Cola. Additions include Alphabet (Google), Visa and Medtronic.

Many of the directors as well as the manager Lyon have significant share holdings in the trust which is always a good sign as they obviously have an interest in ensuring the success of their investment.
 
5 Yr Performance v FTSE A/S Index
(click to enlarge)

I am no longer interested in income but the trust has paid dividends of £5.60 p.a. in each of the past 7 years - a current yield of 1.3% which is probably better than interest on most building society cash savings at present.

Fortunately they have recently sold the only oil & gas holding so the portfolio is fossil-free and therefore eligible for my portfolio as a replacement for Capital Gearing which holds the iShares FTSE ETF with its high exposure to the likes of Shell and BP - and hence the reason for that trust being sold last year. Likewise with my multi-index funds like Vanguard Lifestrategy and HSBC Global Strategy which had to be set free last year.

I would be happier if the trust did not hold the shares in the tobacco companies and also I would prefer the more traditional gilts to short dated index-linked TIPS but I can account for this via my other portfolio holdings. The main consideration for the next year or two (...five?) is stability and preservation and I hope this will help on both counts.

I like the look of this trust for its conservative/defensive qualities - and the fact it is different to most other investment trusts. I also like the concept of preserving capital in these uncertain times.

The shares were added to my portfolio this week at the price of £432. The trust is due to publish results for the full year to end April next month.

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!

Wednesday, 29 April 2020

Gresham House Energy Storage - 2019 Results


Since its launch in December 2018, Gresham House Energy Storage (GRID) has developed the largest energy storage portfolio in the country. As we transition from fossil fuel generation to renewables such as wind and solar, we will increasingly need energy storage solutions due to the intermittent nature of renewable energy - the wind doesn't always blow and the sun doesn't shine at night. Currently we use gas fired generation to fill the gap but we have legislated for net zero carbon emissions by 2050 so the ability to store excess energy from an ever increasing capacity from renewables will be essential. As renewable capacity expands, gas-fired power stations will be required less frequently and they become less profitable to run. This means that renewables are forcing fossil fuels off the grid.


Interestingly, we have just passed a record of 19 days without coal generation - it is only 3 years that we had our first coal-free day in the UK. Coal is still used more in the winter months but currently accounts for just 2% of electricity generation and is due to be completely retired by 2024.

Results

The company have this week released results for the full year to end December 2019 (link via Investegate). Net Assets have increased by 6.5% on a total return basis to 100.8p and share price return is up 11% as the shares moved to a small premium.

Over the year, the company has acquired nine storage projects with a total capacity of 174MW. They have a further five projects in the pipeline with potential additional capacity of 190MW and looking further ahead, the manager has identified 250MW of additional pipeline projects.

50MW Thurcroft Project, S. Yorkshire

Lead investment manager Ben Guest outlines the storage imperative in the report:

"The disappearance of consistent baseload energy is increasing the need for flexible generation - made possible through battery storage. As the market share of renewable energy grows, the amount of temporary excess generation will get worse. By our estimates, instances of more than 10GW of excess power from renewables will occur frequently within the next four years - requiring 10GW of energy storage. In ten years, this could reach 30GW.

Industry forecasters are expecting the rise of renewables will lead to a surge in the volatility of power prices. With the current penetration of intermittent carbon-free generation in the UK energy market, we have already reached a tipping point whereby wholesale energy prices increasingly reach zero or negative levels when their intermittent generation creates supply in excess of demand. Nuclear power, whilst carbon-free, is not flexible and cannot provide a mechanism to balance the system in real time.

This is an excellent backdrop and financial incentive for energy storage operators to 'buy low' at times of overgeneration and 'sell high' when demand outstrips supply; either through participation in the wholesale market or by offering the available battery capacity to the National Grid through the Balancing Mechanism.

As GB's largest battery storage business, GRID is exceptionally well positioned to profit from the expected surge in energy storage demand. By investing in large-scale projects, the fund benefits from substantial economies of scale. This allows GRID to invest in large, operational batteries and run sites more efficiently at a lower cost.

We expect the deployment of battery storage and intermittent renewable energy generation to evolve in a complementary way.  Now that renewables have reached the tipping point we refer to above, every additional unit of power generation will cause an increasing oversupply at certain times while also reducing the market available for baseload, forcing this type of generation out of existence and creating a deeper trough in generation when renewables do not generate. Thus, there is an urgent need for battery storage capacity to catch up to and keep up with renewable generation installations".



GRID has several streams of revenue which include the wholesale market and National Grid balancing mechanism, Firm Frequency Response based on small-scale changes to the grid's electrical frequency, fixed fees for being on call to deliver power at times of extreme need and Triad payments from National Grid when there is peak demand.

The company has paid a total dividend of 4.5p over the past year as promised and has a target of 7.0p for 2020 but subject to review in relation to Covid-19.

I added this trust to my green portfolio last December, just before the general election, at the price of 105p. The current price is 97p.

Obviously this is early days for this relatively new venture. The UK only has around 1GW of storage but this is expected to grow ten-fold over the next 4 years so there should be plenty of opportunities for GRID to expand it's business. The focus so far has been batteries but I am wondering whether they have considered green hydrogen as another option as this also has lots of storage potential.

Finally, they say the business has not been too affected by Covid-19 so far however there will be some delays to the commissioning of projects currently under construction. The share price has dipped 10% to 97p and now trades at around par to NAV.

So far, so good it seems and one to put back in the bottom drawer pending further developments and possible new placings later in the 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!

Sunday, 26 April 2020

A Defensive Move - Looking at Gilts


So, we are in the midst of a global pandemic. The markets have become volatile so now is a good time to re-evaluate my attitude to risk and make the necessary adjustments to my portfolio. We small investors have had a good run over the past decade but I sense this could be coming to an abrupt end and it could be more problematic over the coming year or two.

We have been in lockdown for several weeks and we don't know when it will be relaxed. When we start to come out of isolation there could be a second wave of coronavirus. A vaccine is the answer but it will likely be another year before one is available. In the meantime, the government is borrowing huge amounts to deal with the lockdown emergency - latest figure was £225 billion to cover the next three months! I suspect that may need to increase later in the year. 

The Bank of England has reduced the bank rate to an all-time low of 0.1% and savings rates have just been slashed by the banks and building societies. I've just been informed by the Coventry that my variable rate savings account will drop by over 50% to well under 1.0%.

Over the past year or so I have been moving toward more climate-friendly investing. This has involved ditching my global multi-asset index funds such as Vanguard Lifestrategy and HSBC Global Strategy and replacing them with a mix of renewable energy trusts and individual shares. This seems to be the right way to go as the world must embrace policies to address the climate crisis. However the shift away from VLS 60 for example with its 40% weighting of government bonds has increased the volatility of my portfolio. The sudden market downturn in early March when the FTSE 100 dived 30% in the space of a couple of weeks - 10% in a single day - has reminded me to pay more attention to asset allocation and restore a little more balance to the portfolio.

In early March I was thinking that after a sharp sell-off the markets would bounce back quickly and we would be back to business as usual by June/July. I think it is clear this is now very unlikely and the aftermath could be much worse than the financial crisis of 2008...maybe equivalent to the depression of 1929. On Wall Street the Dow Jones dropped by 35% in the October 1929, bounced back by 20% over the next couple of months before falling away a further 30% over the following year.



Asset Allocation

Earlier this year I took a little time to update my thoughts on Asset Allocation

As can be seen from this visual 'Asset Quilt' from the Blackrock website, any single class of asset is rarely at the top for two years running - some years equities do well and other years bonds are topping the chart, occasionally cash is king. I doubt equities will be topping the table in 2020.

According to the Barclays Equity Gilt study, over the longer term of the past 120 years, equities have delivered a return of 5% p.a. after inflation compared to 2% for gilts and 1% for cash. As should be clear from the asset quilt, this trend is not so clear over the shorter periods of a few years. As ever, it's all about time in the market and therefore the asset mix which matches the temperament and appetite for risk of each individual investor...which changes over time!
 
Barclays Equity Gilt Study 2019

So it's usually a good idea to have a mix of assets, if for no other reason than to reduce portfolio volatility associated with a large percentage of equities. Of course, a large proportion of my 'green' portfolio is made up of renewable energy infrastructure trusts which I regard as a hybrid between equities and property and they have performed well during the sell-off compared to conventional energy stocks such as Shell and BP.

With interest rates back to rock bottom on cash savings, it's tempting to load up on equities during the 'dip' but in the present circumstances I am thinking this would be a mistake so I feel the correct action is to be more circumspect and move towards a more defensive position. Currently I am a little too exposed to equities, I hold some property in the form of TR Property trust (and my house) but currently hold no bonds. So I think a reasonable move at this point would be allocate maybe 20% of my portfolio to bonds and gradually build this to 40% when we see more clarity on the Covid-19 situation.

The Options

Fortunately I do not require income so that makes the choice easier. Also I obviously want to maintain the fossil-free approach so I do not want a corporate bond fund as they will inevitable contain holdings such as fossil fuel companies and banks which I wish to avoid.

Therefore I will look at government bonds - gilts. A simple low-cost index fund from the likes of Vanguard, iShares or L&G will get the job done. So, what's on offer?

(click to enlarge)


The table above covers some of the more popular funds and ETFs from the largest providers. Of course there are many more index providers and lots of managed funds with higher charges but I will keep things fairly simple and select two or three options from these. I do not expect inflation to be a problem in the foreseeable future so will probably pass on index-linked gilts and stick to the low cost UK and Global gilts.

3 Yr Comparison  VGOV v IGLT...almost identical
(click to enlarge)

I think the main point of this is to try to protect some of the gains of the past few years and also find a way to stay in the game for the coming few years if the markets slump. Obviously equities provide the better returns but they are also the most volatile asset class. Bonds provide lower rewards over the long term but offer stability and help small investors to ride out the storms.

Finally, thanks to 'The Accumulator' for this article on the subject. I note that for their 'Slow & Steady' ongoing demonstration portfolio, the UK gilts element of the portfolio is represented by Vanguard UK Government Bond Index with OCF of 0.12% and this accounts for around one third of the total portfolio weighting. It's likely this is one I will go for also or possibly the ETF version (VGOV) which has slightly lower charges and may work out better with my broker on portfolio charges which are capped in my ISA for shares and ETFs.

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!


Wednesday, 22 April 2020

Google - Portfolio Addition



Following on from my foray into the US market and my acquisition of Microsoft earlier this month, I have now added Google's parent company Alphabet to my portfolio.

I guess everyone who uses the web will be aware of what Google does - it is responsible for over 90% of everything we search for. This dominant position means it can generate huge amounts of revenue from advertising - firms will pay handsomely for their product or service to appear at the top of the list of search results. We basically live in the Google age where information and data are sources of power and influence.

I used their Blogger facility to create my diy investor blog in 2013. I use their Gmail service (1.4 billion users) as well as many other offerings - Google Maps, Google Drive, Play Store to search and download apps, watch videos on YouTube etc. etc.

One example of their ubiquitous influence (one of many) is Spotify which claims to have changed the way we all listen to music. It is clearly very successful with over 250 million users, around half of whom pay a monthly subscription. But Spotify, like all but the very largest tech companies (Apple, Amazon), relies on Google to host its infrastructure. Every time you hit play on a song, Spotify pay a fee to Google. In other words, companies like Spotify can only exist and grow due to the infrastructure created by the dominant giants of this new technology age like Google.

Climate

Over the past few years Google has invested billions of dollars to make its operation more carbon neutral and now operates its vast multi-billion $ business entirely from renewable energy. That's taking 5 million tonnes of carbon out of the atmosphere every year - the equivalent of taking one million cars off the road.

Google is the world's largest corporate purchaser of renewable energy and have been working hard for several years to make their extensive data centres as efficient as possible. Whilst global demand for cloud computing has rocketed in recent years, this efficiency drive has resulted in no additional energy usage. Their data centres account for around 1% of global electricity use and all of this is from renewables. They claim to deliver seven times more computing power compared to just 5 years previously but with the same level of energy.

Here's their latest 2019 Environmental Report.(pdf)

In a recent development, Google have rolled out their Environmental Insight Explorer to around 100 global cities providing high resolution data to monitor greenhouse gas emissions and enable action to be taken to reduce CO2 emissions. 

Furthermore, the EIE team have analysed data from 3,000 cities to provide emissions insight from 95 million buildings and 3 trillion km of travel. They found that if these cities were to maximise their solar potential they could generate over 1,000 GW of renewable energy. It's with data like this that governments and cities can develop policies in conjunction with local communities and business to combat climate change.

It seems to me that Google are taking their climate responsibilities seriously however, like Microsoft, they have been criticised by the likes of Greenpeace for their relationship with big oil by providing AI and cloud technology to help locate better drilling sites.  Hopefully Google will iron out this apparently inconsistent position and pursue more sustainable deals.

Latest Results

The company has recently released strong results for the full year 2019. Revenues increased by 18% to $162bn - the lion's share was provided by Google search at $98bn with contributions of $15bn from YouTube ads and $9bn from Google Cloud.

The company is highly cash generative and has reinvested lots of this capital into building its cloud operation over recent years to compete with Amazon and Microsoft. The group finished the year with net cash of $115bn. They do not pay dividends but use some of the cash for share buybacks which benefits shareholders.

The shares have done well in recent years hitting an all-time high point of $1,500 in February before retreating sharply due to Covid-19. I added the shares to my ISA with AJ Bell at the price of $1,230 (£1,000 approx.) earlier this week. I expect further short term volatility but think the longer term outlook is very positive. In the light of the dramatic fall in global oil prices, I am hoping the likes of Google and Microsoft will start to review their ties with the oil majors such as Exxon and Chevron and decline deals which compromise progress towards net zero carbon emissions by 2050 in accordance with the Paris Agreement.

3 Yr Comparison v FTSE All Share Index
(click to enlarge)
The current coronavirus pandemic has resulted in stay-at-home lockdown for millions of people all around the world for several weeks, maybe months. Suddenly there is huge interest in tools that help us all to maintain contact, run a business from our bedroom and for video conferencing. Even our parliament has agreed to trial this new way of doing business. Google has been updating its platform Google Meet and integrating this with Gmail in response to the success of smaller rival Zoom. When these restrictions are lifted in the coming months, it's very likely that many businesses, organisations and people all over the world will want to continue with this new technology - we will see far more working from home, far more meetings conducted via online video. This will be yet another expanding market to boost the likes of Google and Microsoft.

Of course I already hold Google and Microsoft in my Polar Cap. Technology trust. Together they make up 17% of the trusts portfolio but as the trust only accounts for around 3% of my portfolio I wanted to increase my exposure with these individual shares.

The shares have rewarded holders over the past decade with a return of 400% which equates to an average of 17% each year. Whilst that is not likely to be repeated over the next ten years, I would not bet against it!

As ever, this article is merely a record of my personal investment decisions and should not be regarded as an endorsement or recommendation. Individual shares usually carry more risk than collective investments such as index funds - always DYOR!