But above all a year dominated by the devastating decision by Putin to invade Ukraine in February. Hard to believe that the decision of one crazy person can bring about widespread deaths, misery and disruption to millions of ordinary people.
Food, energy and basic materials have all gone up significantly which has resulted in the cost of living crisis and rampant inflation on a level last seen in the 1970s. According to Bloomberg its the worst year for equities and bonds combined since 1926! Government bonds which are normally a safe haven in turbulent times have behaved like risky equites - especially during the brief tenure of Truss/Kwarteng and their proposals for unfunded tax cuts. In fact, the Vanguard Lifestrategy 20 (20% equities/80% bonds) most popular with the very cautious investors, was the worst performer in the LS range over the past year... -15% return.
So, maybe a good time to remember the oldest rule of investing...the value of investments can go down as well as up! Most investors will have had a bumpy ride this year but it’s worth remembering that we’ve mostly had a good run this past decade. Whether we make a gain in any one year is a bit of a lottery so we need at least a time frame of 5 to 7 years to provide a more reliable indicator of strategy.
The markets have taken quite a tumble and most investors will be looking for a reversal, however, I’m decidedly more circumspect on the ability of the global economy to bounce back any time soon and over the past year I have been selling off some equities and dusting off the old tin hat. I set out some thoughts on the risks back in July.
|Vigil at Westminster Hall|
Although the situation in Ukraine and now the cost of living crunch have dominated the news headlines, the climate crisis has continued to get worse and the world gets warmer each year... 2022 is no exception...the UKs warmest ever year... in July the Met Office issued a first-ever red alert for severe heat and our first-ever temperature of over 40C (previous 38.7C from July 2019) was confirmed in several locations on the same day that saw many wildfires around London. It was no surprise to learn that July was our driest month since 1911.
Further afield we saw devastating heatwaves across Europe with many wildfires and the worst drought for 500 years...that’s back to the time of Henry V111 and Anne Boleyn!
Also in the US where 100 million people faced danger to life warnings across more than 25 states... we also saw the devastating floods affecting a third of Pakistan with 30 million people made homeless also Bangladesh and also Sydney - hundreds killed and thousands made homeless. China experienced an unprecendented prolonged heatwave for over two months with record temparatures reaching 43C in several provinces. The drought and prolonged heat combined with continuous Covid lockdowns will have a significant impact on China’s economy.
There are however some signs of some progress - the Inflation Reduction Act in the US will be a landmark piece of legislation aiming to reduce carbon emissions by up to 44% by 2030. In Europe there’s the REPowerEU plans to become independent of Russian gas and oil by 2027 and will speed up the transition to renewable energy.
Unfortunately, we are still waiting for governments to take these issues more seriously. The climate scientists have delivered warnings for many years on the threats from global warming so its really baffling to see the persistent reluctance of politicians to act with urgency and in co-operation around the world to tackle this huge existential problem. A recent report from the UN suggests that since COP26 last year, government plans for reducing emissions have been woefully inadequate and there is now no credible pathway to keep warming below the critical 1.5C.
Another concern is rising levels of debt...the monetary and fiscal response to the pandemic was 3.5x higher than the response to the 2008/09 financial crisis. Global debt is now at its highest since the end of WW2 and it will take at least the coming decade to bring this down to more sustainable levels. This high debt level would be more manageable if interest rates remain low but with surging inflation, the central banks have no option but to raise interest rates and we are seeing inflation starting to create instability in the markets and much higher interest repayments for borrowers.
As a result of the climate situation, I have been reevaluating my investment strategy and decided to make some changes (see below).
So, after a rollercoaster couple of years dominated firstly by Covid, and now all the uncertainties thrown up by the invasion of Ukraine, it’s not surprising that global markets have
struggled to make progress this year.
At the halfway mark, I decided to de-risk my portfolio starting with a raft of equity sales - Microsoft, Google, AJ Bell, Orsted, Vestas, ITM Power and a reduction in various collectives - iShares World SRI and Allianz Global Technology.
However I have increased my renewable infrastructure - more Bluefield Solar, TRIG and Greencoat UK Wind as I was hoping they will benefit from the rise in power prices...well, that was before the government’s new tax on renewable energy!
I have also invested in a couple of unlisted opportunities... Ripple Energy community wind farm which is currently under construction and due to be completed in November 2023 and also invested in Thrive Renewables who launched a new share offer to raise £7m for new renewable energy projects.
However, I still have a large percentage in cash and will probably keep this on the sidelines for the coming year to see how things unfold.
I have just put in the final figures for the spreadsheet of my investment portfolios - sipp flexi drawdown and ISA - for the full year to 31st December.
The FTSE 100 has done better than most markets this past year and has risen from 7,384 to 7,452 and taking dividends into account a total return of 4.6% for the full year. As a matter of interest, the FTSE 100 finished at 6,749 when I did my first annual review to the end of 2013. Not much progress over the past 9 years!
The US markets are down much more with the S&P500 falling 21%...Tesla down 70% and Meta (Facebook) down 65%.
The Vanguard Lifestrategy 60 fund is a diverse mix of global equities and bonds and although I disposed of my holding some years back, it provides a good benchmark for a balanced global portfolio. The fund is down -11.2% over the past year and the VLS 80 is down -8.8%
Technology - With returns of over 50% in the previous two years, I was half expecting some pull-back this year but maybe not quite as dramatic! My tech sector is down 20%. After the mid year sale of various shares, Tech now accounts for just under 10% of my portfolio.
Green - After triple digit gains for many of my green portfolio holdings in 2020, I think it was inevitable that there would be some pull back. Over the year I have taken profits on quite a few holdings - NIBE, Orsted and Vestas, sold Nel in August and also ITM Power. These now represents 55% of the total...down from 80% at the start of 2021 After a stellar year in 2020 and gains of 52%, my green sector has come back to earth with total returns down -13.9% ...exactly the same as 2021. The small hydrogen-focussed shares were the biggest casualties with Ceres down 60%, ITM Power down 65% and L&G Hydrogen ETF down 29%.
The positive returns have been provided by iShares Global Clean Energy +5.5%, Bluefield Solar and Greencoat Wind both +10%, SSE +17% (now sold) and Gresham House Energy Storage +29%.
Defensives - I thought it was a sensible move last year to bank some of the profits from equities and move into government bonds and gold. This has certainly helped to mitigate some of the falls from my technology and green sectors this past year. Whilst the gold ETF is up 11.5%, a big surprise however has been the decline in my index-linked government bonds...down 50% in September following the disasterous Truss/Kwarteng blip. The sector as a whole is down -7.9% on the year.
The Complete Basket
As a whole, the portfolio has delivered a total return of -12.8% over the past year which takes account of all dealing costs. Here's my portfolio returns covering the past 10 years.
A sum of £1,000 at the start of 2013 has more than doubled to £2,100 and an average annualised return over the past 10 years of 7.8%.
Obviously an average annualised return of just under 8% over the past decade is very acceptable. It could have been much better this year had I locked in returns from my green/tech sector earlier...investing is so much easier through the rear view mirror! Of course, patience and the ability to stick with the plan are key to successful investing but that has not worked out so well these past two years. The clean energy and hydrogen sectors have had a bumpy 12 months but with all the growing risks, I am not so confident they will provide a good return over the coming years. Return on my investments have been positive in 7 of the past 10 years.
Obviously as a grandfather to five, I am concerned about the climate situation and how badly it will impact the world over the coming years. The devastating images we have seen these past couple of years - wildfires over huge areas of the west coast states of the US and Siberia, devastating flooding and disappearing polar ice caps should be a warning of what's coming down the line for the planet if we carry on with business as usual. Hopefully in the coming year we will get some real leadership but after COP 27 and a refusal to agree on a strategy to phase out fossil fuels, I am not very hopeful.
I am in no doubt that the risks to the global economy have increased this past 12 months which is why I have sold off a large proportion of my portfolio. However, if the climate continues to get worse, the global markets may well become more unstable and the better green companies could be dragged down with the rest. Maybe I should call it a day and sell off the rest of my portfolio...maybe cash/gold will be the place to be over the next decade?
How we tackle the climate crisis over the coming few years will be the defining story of our generation. I hope the global community can start to fully appreciate the risks and address some of the fundamental issues in 2023 and we can speed up the transition away from fossil fuels and avoid some of the dire consequences which lie in store with warming over 2.0C....as they say, it's going to be very interesting!
Finally, wishing all readers a happier New Year and thanks to all for dropping by during the past year... all best wishes for 2023
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 the past year.
Thanks as ever for your this post. I read these updates with interest and the time and effort you put in is always much appreciated.ReplyDelete
For what it's worth, i too went more defensive this year and have finished about 2% down in my stocks and shares ISA and 0.5% down in my SIPP pfs. Both contain 'green' holdings, notably INRG in my ISA pf (I think i bought this ETF to your attention a couple of years back) and GRID in my SIPP. But i don't hold nearly as many as i'd like. One of the main disadvantages about the likes of UKW, FSFL, GRID etc is their high fees, particularly on a platform like HL which of course imposes its own fee on top. I've been trying hard this year to reduce the amount of fees i'm paying, a sum which over the years can tot up a horribly high amount if one's not careful.
Anyway, happy new year to you and all your readers and best of luck with your holdings for '23.
Thank you and yes I think it was your comment back in Feb 2019 that prompted me to have a look at the clean energy ETF and which was added to my portfolio the following month @ 433pDelete
It's been a bit of a rollercoaster ride since then with the share price reaching a high of £14 in January 2021 and then £7.40 a year later.
Agreed charges are higher - around 1.0% for TRIG and UKW and 1.5% for the likes of Gore St Storage...hopefully these will come down as they grow but even after the charges I cannot be unhappy with returns these past few years.
You must be pleased with returns of -2.0% and -0.5% given all the market turbulence over the past year...good luck for the coming new year.
Thanks for the update DIYUK.ReplyDelete
Like you, I've pivoted my portfolio to greener pastures and have not suffered the fate of many portfolios this year.
I haven't run my numbers bit I think that I'm broadly flat for the year.
On fund fees. I am not sure how you compare the fees for say UKW at around 1% - a fund that owns shares in a range windfalls aforesaid the UK compared with say a company like Harbour Energy which owns a number of oil and gas facilities across the UK and employs hundreds if not thousands of staff but for investment purposes has zero fee.
Is there a cheaper way to invest? Other than cutting your own usage at home (and even then, you'd have to beat the IRR of the likes of UKW - 8%ish) - I think that capital intensive but labour light renewable energy investments are value for money.
If you are broadly even this year I would say that's a good result given the falls in global equities and government bonds are in double figures so well done!
Obviously its good to be aware of costs/fees but also to avoid large drops in capital value as far as possible over the long term. As you say, maybe the 1.0% fees for UKW are not so bad if they deliver a consistent IRR positive return of 8%.
Good luck with your portfolio for the coming year.
Thanks for this update as always, DIY and happy new year to your!ReplyDelete
My total portfolio was down by -8%, annualised return is +7% since 2014 so happy with that. I still hold some bond ETFs (ones I didn't switch over to defensive ITs) which performed abysmally but I can't bring myself to sell them at a loss so will just hold them and not add to them - think they make up 8-9% of my invested portfolio.
I too can't see global markets recovering anytime soon, perhaps will get worse before getting better, so just need to grit my teeth and continue investing in accordance to my strategy.
Thanks weenie and likewise a happy new year to you!Delete
That 7% annualised return over such a lengthy period demonstrates a sound investment strategy and also the ability to stick with it which is just as important. We have both witnessed many investing blogs fade away over the years so well done!
I've just been reading a gloomy forecast on the global economy from the World Bank which suggests problems for the US, Eurozone and China all undergoing a period of pronounced weakness and the global economy perilously close to recession...as you say, maybe the markets will get worse before they get better.
Anyway, good luck for the coming year and with the gritted teeth and hope it doesn't lead to a visit to the dentist!