Can portfolio managers afford to divest?

There is growing argument that portfolio investors should exclude fossil fuel producers from their portfolios. MSCI has undertaken a ten year simulation as to what that investment strategy would look like.

MSCI - 10 year

That is a comparison of the MSCI All Country World Index Investible Market Index compared to the same index excluding a list of carbon-reserve owning companies provided by the California State Teachers Retirement System.

Two things to note – first the fossil fuel firms are obviously tracking the broader index. Hardly surprising given the relaince on the general economy on energy. The more important observation is that a portfolio tracking the broader MSCI index would underperform if it excluded fossil fuel stocks.

Then there is the argument that portfolio managers should exit fossil fuel stocks and invest in ‘green stocks’. Would that be a good strategy? Well not if recent past trends are any guide.

The MSCI Global Environment Index Report (January 31, 2014) shows that the Sharpe Ratio for this index relative to the broad MSCI index are poor.

MSCI - Sharpe 1

So too the MSCI Global Climate Index Report (January 31, 2014):

MSCI - Sharpe 2

Given numbers like that (i.e. quite poor performance on a risk-adjusted basis) I would expect portfolio managers to have very good reasons for being overweight in green stocks.

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18 Responses to Can portfolio managers afford to divest?

  1. brc

    I recommend that all environmentalists invest heavily in green stocks. To fail to do so shows a lack of belief. The sooner all those who truly believe go broke, the quicker the truth will emerge.

  2. Jim Rose

    Doesn’t peak oil mean that oil prices and oil company dividends are on the up and up?

  3. Andrew

    Is there a MSCI Flannery Index?

  4. Baldrick

    Yep, Green is the way to go for carbon-haters.

    Just ask Flannery about his investment in Geodynamics.
    From a high of $2, after Krudd pumped $90 million of taxpayers money into the whimsical scheme and currently trading at about 0.08 cents. Bonuses all ’round.

  5. Rabz

    Given numbers like that (i.e. quite poor performance on a risk-adjusted basis) I would expect portfolio managers to have very good reasons for being overweight in green stocks.

    Insider information and subsidies.

  6. Sinclair Davidson

    Jim – the greenies have a different story now. Before it was divest because we’re running out. Now it’s divest because we’ve got too much.

  7. Andrew

    I can vouch for the fact that super funds are taking this BDS programme seriously – to the point where they’re almost being bullied if they don’t at least make a show of it.

  8. Jim Rose

    sinclair, its blackmarketeering101 that you stock up on what will be in short supply soon?

    didn’t the greens learn this at a young age from walker on dad’s army?

  9. Token

    This sounds insane. Better stay informed as their will be a killing to be made by this government induced insanity.

  10. Token

    Before it was divest because we’re running out. Now it’s divest because we’ve got too much.

    Einstein famously said the supply of stupidity is infinite.

  11. Bruce of Newcastle

    I think this is fun. The progressive-greens do all sorts of odd investment things. They boycott any companies from Israel, evil oil companies, coal companies, nuclear, other mining companies, tobacco companies, all GM agriculture and satanic Monsanto, forestry and paper companies and big exploitative capitalistic banks. Doesn’t leave much left out of the ASX 50.

    Then they like to invest their money in green industries which have a perfect 100% record of faceplanting within a few years. Like all those green energy, EV and ecosustainabilty companies that Obama has been loaning money to which have gone bankrupt.

    Its almost caricature Marxist economics – invest only in stuff that fails utterly and don’t invest in anything that ever actually makes a profit.

  12. Andrew

    Greengrubs have been salivating over that massive solar project in the Arizona desert. As big as the entire City of Perth LGA, if the land wasn’t already a wasteland it certainly would have been after. Produces as much electricity during a day as ONE decent size coal plant does in an HOUR. Cost as much as a coal plant too. But the electricity created is totally free (if you ignore the Windex guy that has to clean mirrors, and the inevitable replacement costs every few years, and the exposure to hailstorm damage etc, and the wear and tear on a turbine that starts-stops-starts-stops).

  13. Andrew

    Greengrubs have been salivating over that massive solar project in the Arizona desert. As big as the entire City of Perth LGA, if the land wasn’t already a wasteland it certainly would have been after. Produces as much electricity during a day as ONE decent size coal plant does in an HOUR. Cost as much as a coal plant too. But the electricity created is totally free (if you ignore the Windex guy that has to clean mirrors, and the inevitable replacement costs every few years, and the exposure to hailstorm damage etc, and the wear and tear on a turbine that starts-stops-starts-stops).

    What’s not to love?

  14. JC

    Let them divest. Others will scoop up the stock and get better returns making the divestees performance appear even worse.

  15. 2dogs

    Is there an index fund consisting of the excluded fossil fuel stocks?

    I’m ready to invest now.

  16. michaelfstanley

    Sinc would you agree that if the Greenies are able to convince people and governments to take action on Climate change that would represent a risk to Fossil Fuel holdings?

  17. Combine Dave

    Sinc would you agree that if the Greenies are able to convince people and governments to take action on Climate change that would represent a risk to Fossil Fuel holdings?

    If fossil fuel extraction were forbidden, wouldn’t that just make existing stocks and superior fossil fuel powered resources more valuable?

  18. michaelfstanley

    If an ETS/Carbon Tax made it uneconomic existing and future resources would both be stranded.

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