Portfolio Review - End 2022

Another year rolls by and this is now my 10th end-of-year review since starting my blog in February 2013. And what a year it’s been...Boris gone and replaced by Liz Truss who lasted 7 weeks before being replaced by Rishi Sunak. The passing of our longest serving monarch, Queen Elizabeth in September with many thousands queuing for up to 14 hours to pay their respects.

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

Climate Change

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). 

Investments

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.

Portfolio Returns

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. 

2013 13.3%, 

2014  5.4%, 

2015  2.7%  

2016 11.4%

2017 11.3%

2018  -2.7%

2019  21.9%

2020  43.8%

2021  -6.5%

2022 -12.8%

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%.

Conclusion 

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.