Portfolio Review - End August 2020

Two-thirds in and what a year we are witnessing!

Lots of new language...and customs...ways of working and ways of interacting...

coronavirus        

           social distancing       

 lockdown      

furlough       flatten the curve        

 'R' value <1          stay at home           <--2m-->       ZOOM                      
                          facemask                       PPE    

wash your hands            rainbow             work from home    

The Covid pandemic is still playing out around the world but the markets seem to be adjusting to the new normal and have recovered the ground lost earlier in the year...except for the UK FTSE 100 which remains moribund, down -20% for the year to date.

Many are anticipating that we will return to business as usual when the restrictions are lifted but I am sceptical. First, the restrictions may remain for quite some time, certainly until a vaccine is available some time later next year and maybe longer. Secondly, the pandemic has uncovered weakness in many sectors of the economy which were struggling before Covid such as retail, real estate, banking, tourism and oil & gas. Now add in the hospitality sector and aviation and I think there's a strong possibility that many companies in these sectors may never recover.

  

We have also seen a massive financial stimulus from the central banks around the world combined with the slashing of interest rates to almost zero.

Here in the UK before the outbreak, the OBR were forecasting government borrowing for the current financial year 20/21 at £55bn. The scale of increased borrowing is currently unclear as we don't know how long before business as usual resumes but the estimates are that borrowing could easily exceed £250bn next year.

credit: economicshelp.org

In July, public sector borrowing rose above £2 trillion for the first time in our history which equates to 100.5% of GDP. We last witnessed this level of borrowing during WW2 and it's unlikely to be coming down anytime soon.

As with the financial crisis of 2008, the long term effects of this current crisis could be just as long-lasting.

Portfolio Changes

I have been moving some of my portfolio to cash to finance a potential house move later in the year (more on this in a future post). There have been several additions to my portfolio as well as some top slicing and a few sales over the past few months.

Additions include US big tech - Microsoft, Google and more recently Tesla, also McPhy, NIBE and Powercell, Trojan Ethical and several government bond funds/ETFs.

Sales include Smart Metering, Legal & General, Air Liquide, National Grid, TR Property and Proton Power.

Finally, I have top sliced some of my holdings which have seen significant share price rises since April. These include AFC Energy, Ceres Power, ITM Power, McPhy, Orsted, Vestas Wind and most recently Tesla and Microsoft.

Portfolio Returns

The FTSE 100 started the year at 7,542 and is currently 5,964, if we add back in say a further 2.0% for dividends paid, this will give a ballpark total return loss of -18.9% for the past 8 months. The UK market has not been kind to investors for at least the past decade as this excellent article by IT Investor illustrates.

Although no longer a part of my portfolio due to fossil fuel holdings, the Vanguard Lifestrategy 60 fund is a diverse mix of global equities and bonds and provides a good benchmark for a balanced global portfolio. The fund is up 0.8% over the year to date (the VLS 80 down -0.7%).

FTSE 100 ETF v S&P 500  2020 to date
(click to enlarge)

Green Funds

These holdings now make up around 80% of the total portfolio. They held up better than the market during the downturn in Feb/March and have done really well these past four months as fund managers and pension funds move towards ESG and more sustainable options.

The better returns have come from ITM Power up 290%, largest share holding Orsted up 43% and recent addition McPhy 300%. My global clean energy ETF is up 47% and Tesla gained over 50% since purchase last month. My largest renewable energy trust TRIG has fared reasonably well with a gain of 10% including dividends but other renewable infrastructure trusts are struggling - Foresight Solar -8% and NextEnergy Solar -6%.

The total return including dividends for my green allocation is 27.5%.

The Complete Basket

My only other holdings are TR Property (recently sold) -15%, Mid Wynd IT is up 10% and Polar Capital Technology up 30%.

I decided to add a few bond funds earlier in the year to balance the element lost when I sold my Vanguard Lifestrategy funds last year. So far they are down 1.5% but I think that is to be expected given the strong rebound by equities.

I have just updated my spreadsheet with the returns including dividends of my actual investment portfolios - sipp flexi drawdown and ISAs - for the 8 months to 28th August.

As a whole, the portfolio has delivered a total return of 21.6% for the year to-date.

Just for comparison, Scottish Mortgage Trust (SMT) is up 63% so far this year, Finsbury Growth & Income (FGT) down -6.5% and City of London (CTY) down -25%.

Conclusion

It's now getting on for two years since I started to move my portfolio towards more climate-friendly investments and it is reassuring to see they have done so well during this market storm. I certainly feel much better investing in the likes of Orsted, a global leader in offshore wind, rather index funds with their fossil fuel companies and the big banks that finance their operations.

It's obviously better to be up 20% than down 20% with a FTSE 100 index fund which will have taken a big hit from holding the big oil companies such as BP and Shell.

However, I doubt this is the end of the Covid pandemic and I expect the ramifications to play out for at least the next couple of years. The huge negative impact on global economies contrasts strongly with the rise in global markets - the S&P 500 has risen to an all time high - and suggests a disconnect which must be squared at some point.

Wile E Coyote about to experience the disconnect...

The other big event on the horizon is the US elections in November and whether Trump gets another four years. Climate change is the big dividing point between the presidential candidates and I am hoping Biden can win the election and implement the $2 trillion Green New Deal which would be a huge boost for all things green. If Trump wins, I'm off to find a log cabin in the hills with my solar panel and a years supply of baked beans...yes seriously!

It's going to be an interesting few months and I honestly have no idea how it will pan out by the end of the year. It feels like unprecedented times.

"Survival as an investor over that famous long course depends from the very first on recognition that we do not know what is going to happen. We can speculate or calculate or estimate, but we can never be certain". (Peter Bernstein) 

As always, if you keep track of portfolio returns, feel free to leave a comment and share with others how your investments have fared over recent months.

BP is Going Green...?

As concerns about climate change rise to the top of the political agenda, the role of the big oil companies and their contribution to carbon emissions comes under more and more scrutiny.

BP's new CEO Bernard Looney said he was prepared to engage with stakeholders such as the big pension companies and earlier this year pledged to find ways to make the transition to net zero emissions by 2050.

“BP has to change, and faster than ever, because the world is changing fast, and so are society’s expectations of us,” Mr. Looney said.

The Results

Earlier this week BP announced Q2 results - one of the worst quarters in its history with a loss of $16.8 bn for the 3 month period and resulting in a 50% cut to the dividend.

At the same time, BP announced their new ambitious strategy on climate to deliver net zero emissions in accordance with the Paris Agreement.

The basic plan is to transition from an international oil & gas company into an integrated energy company. This will entail a 40% reduction in production of fossil fuels by 2030 and a 10x increase in renewables - $5 bn per year.

This move will make BP the leader of the pack in the new race to zero and will place pressure on the other oil companies to review their own strategies.

Mel Evans of Greenpeace UK says BP “has woken up to the immediate need to cut carbon emissions this decade”. She adds that the company “must go further… but this is a necessary and encouraging start”.

Conclusion

One of my portfolio holdings, Orsted have transformed themselves from a Danish oil and gas company to a world-leading renewable energy company over the past decade and there is no reason why BP could not follow this lead albeit on a much bigger scale. Maybe they really are moving Beyond Petroleum...as they were suggesting 20 years ago.

Obviously I am very pleased to see this decision by one of the major multinational oil giants. In a way it was always inevitable that the old ways of working were unsustainable. Therefore this move needed to happen sooner or later and it remains to be seen what they actually DO but this could be the move which breaks the log-jam and opens the door for a cascade of action on climate change from big oil. It certainly would not be before time.

BP share price down 40% this past year

In the coming decade we should see large areas of the global economy moving from a reliance on oil and gas to climate-friendly sustainable alternatives - wind, solar, hydrogen.

I will be interested to hear more detail on the plans during its capital markets presentation in September. But we could be seeing the start of a new world order unfolding...fingers crossed!

Feel free to have your say in the comments below. Is this a genuine game-changer or more greenwash? Will the other oil companies follow?