Monday, 20 April 2020

My Strategy is Evolving...2020 Update

We're in the midst of the Covid-19 lockdown. It started on 16th March and could well continue for several more months and maybe into next year so, apart from my daily walk, I have lots of time on my hands and I'm busy doing not very much - luckily the weather has been good....which a bit ominous as it's only April.

Whilst the coronavirus pandemic is dominating the news, the climate crisis has not gone away. Following on from the extensive bushfires in Australia at the end of last year, Europe has just recorded its warmest Winter since records began. Average temperatures for the three months to end February were 1.4C above the previous warmest period recorded in 2015/16 and 3.4C warmer than the 30 yr average for 1981-2010.

If the Covid response is teaching us anything, it's that it's usually a good idea to take notice of the science and change our patterns of behaviour to minimise the global threats. President Macron suggested recently that if the world can do the unthinkable to their economies in an effort to confront the coronavirus, then surely it can do the same to arrest catastrophic climate change. Clearly the climate crisis is an existential global threat - i.e a threat to human existence. The way we invest our capital is just one of the big challenges that must be addressed to move towards a more sustainable world order.

As it's a couple of years since I last reviewed my investing strategy and my focus has certainly moved in relation to climate change, I thought maybe it's a good time to update on where I am going with it. Obviously any strategy needs to be flexible and adaptable to changing circumstances and needs...nothing is set in stone.

Looking back to early 2013 when I started this blog, it is clear there has been quite a few changes. Back then I was bridging the 10 year gap between early retirement and state pension and focused on a portfolio of individual higher yielding UK shares combined with a ‘basket’ of investment trusts to generate the natural income I required.

By 2016 I was becoming attracted to the globally diverse multi-asset approach and the individual shares were sold along with some of the investment trusts. They were replaced by a large portion of Vanguard Lifestrategy and HSBC Global Strategy index funds.

In 2018, my circumstances changed as the state pension kicked in which means I have no need for income from my investments. Later that year I was re-evaluating my strategy in the light of the growing threats from climate change. I was becoming increasingly uncomfortable generating returns from a portfolio of passive index funds which inevitably hold a large proportion of fossil fuel companies such as Shell, BP and Exxon who continue to extract more and more oil which we just cannot afford to burn any longer and which continue to add to global warming.

The Transition

By early 2019, I had put my index funds under the spotlight and decided to remove the big oil companies and the banks which fund their activities. In May 2019, I posted a lengthy article which brought together my thinking on the important subject of climate change and which I regard as by far the most important article posted over the previous six years. I think it was at this point I decided to fully commit to the future and transition to a fossil-free portfolio.

There are many reasons why I was attracted to low cost passive investing but sadly I have come to the conclusion that, as it stands, it is unsustainable so long as it continues to treat the fossil fuel companies in the same way as the rest. As investors, we are part owners of everything we choose to hold in our portfolio. I just cannot continue to own these multinational oil companies which feature prominently in all the passive index funds - in the full knowledge of the fact that what they are doing will result in an uninhabitable planet by the end of this century. I am sure there will be many people who feel the same way.

My critique of passive investing is set out in this article from earlier this year. As for the ESG funds, I came to the conclusion that holding a bit less of an oil company exploiting the Arctic for more and more oil that we can't afford to use is just not going to cut it for me.

It would be good to have the option of a climate-friendly global index fund but so far there are no such funds available which meet my requirements. In the absence of such funds, I have decided to build my own fossil-free portfolio. So, the Lifestrategy and HSBC index funds were sold and replaced with a mix of renewable energy infrastructure trusts such as TRIG and Greencoat UK Wind. I have also added some stand-alone shares with the likes of Orsted, Microsoft, Vestas Wind and some smaller company shares such as ITM Power. My portfolio became fossil-free in September 2019.

These currently make up just under 80% of my portfolio and are listed here. I have retained two other investment trusts - Mid Wynd and Polar Cap Technology which together make up the remainder.

Obviously it's early days but I was encouraged by the performance of my 'green' portfolio last year with a total return of 23.5% compared to 17% for the FTSE 100.

Obviously one of the big advantages of a globally diverse, multi-asset index fund such as the Vanguard Lifestrategy is the ability to manage risk. During the inevitable volatile periods such as we have seen with the Covid-19 pandemic, it's much easier to ride out the storm with a mix of 40% equities and 60% bonds which are rebalanced on a daily basis. Over the Q1 of 2020, the FTSE 100 was down 25% whereas the VLS40 was down just 6.5% and the VLS60 down 10.4%.

So, there is a conscious trade-off made by moving away from the traditional mainstream global index funds which contain all the fossil fuel companies (and will always do so) and my climate-friendly niche portfolio. Of course I have considered a half-way compromise - say, moving just 20% or 30% of my portfolio to the green funds but this approach would not sit easily with my personality. I think I am basically an all or nothing sort of person! If fossil-free is the right way to go then fully commit.

The Next Phase

Therefore the initial 10 year plan had been to generate income from my investments to bridge the gap to state pension...and that part of the journey became mission accomplished in 2018. My state pension is currently £9,000 p.a. and should keep pace with inflation.

I have always subscribed to the philosophy of 'keep it simple' - I enjoy the challenge of living with less; I hold no desire whatsoever to make a fortune, to become a millionaire. I seem to always have had an ability to live within my means so, whilst my lifestyle remains modest - some would say frugal - this is a deliberate choice. I accept most people would happily spend the additional money on more holidays, clothes, new car maybe and a host of other delights. However I choose voluntary simplicity of lifestyle and spending money on these things would not result in greater happiness so would be a bit pointless.

Plato said "The greatest wealth is to live content with little". The reality is that when you have enough...and you're content, there's no point trying to get more and more.

I now have a guaranteed income and therefore really have no great financial need to continue investing but I like to think I am supporting the areas and companies that are trying to address our climate emergency - renewable energy in particular. 

However, in the light of the global market turmoil brought about very suddenly by the Covid-19 pandemic, I am wondering how the markets will respond to the much greater threat of climate breakdown in the not-too-distant future if we fail to address these much bigger challenges. The big oil companies, airlines, holiday and leisure sectors have been casualties over the past month or so and the technology and renewable energy have held up reasonably well so far. If there was a green swan event in the future, I'm not confident any sector would fare well given the interconnected nature of our economies and lifestyle. Maybe now is a good time to reintroduce some government bonds.

So, some further reflection needed over the coming year or two and let's see if Trump gets a second term; let's see how the big oil companies respond to their pledge to move towards carbon neutral; let's see whether policies to address the climate crisis and a more sustainable finance system can ensure we do not return to business as usual post Covid.

Feel free to share any thoughts with others in the comments section below - has the coronavirus pandemic changed your approach to is your strategy evolving?


  1. I have to say that partly because of you I am starting (albeit slowly) to transition to more sustainable forms of investing, trying to pick companies that are sustainable. It's not easy for me because most of these companies do not have very high yields, meaning that the compounding that I can generate gets smaller (I am at least 20 years away from potential retirement). So I need to balance things a little, but at least the door is open and I am willing to sacrifice some Bbp in yield to have a more sustainable portfolio.

    I also agree that the response to Covid has been quite crazy, and all in all this virus is a pain in the arse but it's not half as deadly as a major environmental event could be. Hopefully some countries will learn something from what happened, although it seems to me that all attention now is on "kickstarting the economy asap", which will probably mean lowering sustainable standards... Of course I hope I am wrong here.

    Ciao ciao


    1. Hey Stal, it's good to hear you also are moving towards more sustainable investing! As you say, it's not so easy when you are looking for the higher yields...dare I say much easier to find these currently from the fossil fuel sectors! Obviously it is easier to do this from my situation - retired with a guaranteed source of income which does not depend upon the stockmarket.

      As we start to come out of lockdown and reboot the global economies, I am hoping this experience can be used as a springboard to build a more resilient and sustainable system. We simply cannot return to business as normal.

      Good luck with your sustainable choices in the future.