Can portfolio managers afford to divest? II

There was an interesting story in the Fairfax media today:

Australians could sell their shares in fossil-fuel companies with little impact on overall portfolio returns while eliminating exposure to the so-called “carbon bubble”, a new report by The Australia Institute says.

The report, Climate Proofing your Investments, produced with 350.org and Market Forces, ran simulations of share prices on the ASX 200 since 2003.

It found annual returns of 13.36 per cent for the overall market fell to only 13.22 per cent when fossil-fuel extractors and companies with downstream exposure were ditched.

So it looks like they have dropped 21 stocks from the ASX 200 and then optimised that portfolio (ASX 200 ex-21) to replicate the actual ASX 200. This is how it works out:

Coal replication 1

Then some actual details:

Coal replication 2

Have a look at the tracking error: 0.88%. A this point the report gets a bit vague:

Tracking error is a measure of deviation from the index. One per cent or lower is generally
considered negligible and equivalent to the index. It is not a measure of loss.

Considered negligible by whom? I hunted around for some benchmarks for tracking error and found this – it’s a bit dated, but damning.

An annual study by investment dealer Morgan Stanley found that the average tracking error for U.S.-listed ETFs (excluding inverse and leveraged versions) was 0.52% in 2008. If this average is weighted by assets under administration, the average comes in lower, at 0.39%.

So the tracking error just from screening fossil fuels is 0.88% while the overall average tracking errors for passive funds is 0.39% – 0.52%?

As we’ve argued before divestment isn’t looking as good as the environmental movement would have us believe.

I did find this bit amusing (emphasis added):

This report is for information purposes. The authors and the publisher of this report are not in the business of providing financial product advice. The report is not an offer to buy, sell or in any way deal in any financial product. It is not meant to be a general guide to investment, nor any source of specific investment recommendation. It is generally available to the Australian public.
Please be aware this document is not intended to be provided to investors subject to US securities law. Should it inadvertently come into the possession of such an investor please be aware of the following. The information contained in the document was carefully compiled from sources we believe to be reliable, but we cannot guarantee accuracy. We provide this information with the understanding that we are not engaged in rendering legal, accounting, or tax services. In particular, none of the examples should be considered advice tailored to the needs of any specific investor. We recommend that all investors seek out the services of competent professionals in any of the aforementioned areas. With respect to the description of any investment strategies, simulations, or investment recommendations, we cannot provide any assurances that they will perform as expected and as described herein. Past performance is not indicative of future results. Every investment program has the potential for loss as well as gain.

Indeed.

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17 Responses to Can portfolio managers afford to divest? II

  1. blogstrop

    Fairfax did that fraud on its readers? I’m shocked.

  2. JC

    This is like the muslim ban on receiving interest. Its green sharia portfolio investment.

  3. Samuel J

    Divestment of Israel exposure and fossil fuels – why not add a whole lot of other things? If fossil fuels are becoming more expensive (as we are running out according to greenies), their price will increase. If the idiots want to short, that’s fine, I can buy at a lower price. But they’ll still be buying my fossil fuel products.

  4. Biota

    A worry is what the silly buggers will replace the divested investment with. Windmills? Solar? Hot rocks? Then investor’s money will be down the drain.

  5. Bruce of Newcastle

    Can portfolio managers afford to divest?

    That would be an interesting problem for the climatic investor.

    Lets assume a climateer would want to divest their evil oil shares. What would they move their money to…?

    Lessee…

    Banks. No, not banks. They are evil rapacious and capitalistic. Wouldn’t be ethical for a self respecting climateer to invest in (even though they are returning 7% in grossed up dividends alone…this capitalism thing is a good moneyspinner innit?)

    Mining companies. Noooo, not evil Gaia raping pollution capitalistic mining companies.

    Real estate REITs. Nooo, ownership of land is evil anti-Marxist bourgeoisie naughtiness. Can’t do that.

    Tobacco companies. Nooo, evil tobacco companies are almost as evil as evil climate deniers.

    Big Pharma. Nooo, big pharma have been exploiting the poor oppressed brown skinned peoples of the world by taking out patents so they can pay for the billion dollars or so it requires to bring each drug to the market. Not big pharma.

    Insurance companies. Nooo, not them. The terrible extremes of global warming climate change they will go bankrupt paying out for all the terrible climate events (which so far haven’t happened)

    Betting companies. Noo not them, they exploit the poor by hooking them into problem gambling.

    Booze companies. No…not them either.

    Media companies. No. The only ones making money, like News Corp, are evil. All the virtuous media companies like The Guardian, NYT and Fairfax are losing money hand over fist. Can’t invest in them.

    Green energy companies. Yay! Here we go. We can really invest in them! Like Flannery’s favourite Geodynamics which has lost 95% of its value in the last 5 years. Or all those Green companies that Obama has been helping which have gone bankrupt.

    That would be an oops.

    Well what about carbon emission certificates? Er, that hurts.

    This ethical investing thing for climateers is…hard.

  6. nerblnob

    Who cares? Oil & gas company stocks go up and down like any other. One person’s divestment is another one’s opportunity. One thing is sure – demand for “fossil fuels” is on a long upward trend, whatever hiccups there may be on the way..

  7. Beertruk

    Green energy companies. Yay! Here we go. We can really invest in them! Like Flannery’s favourite Geodynamics which has lost 95% of its value in the last 5 years. Or all those Green companies that Obama has been helping which have gone bankrupt.

    Or until the Government stop subsidising them.

  8. 3d1k

    Irresponsible in the extreme. Just what are the proponents of such action thinking? Potentially jeopardises fossil fuel’s ability to gain access to capital necessary for future investment and production. Crucify legitimate businesses on the altar of the Green agenda.

    And then what? Stranded assets. Not to worry, the green dreamers have it all under control! But of course they don’t – fossil fuels and their derivatives are integral to all modern existence. Aviation fuel; petroleum; diesels; multitude of plastics and polymers; reliable affordable energy source for both the developed and emerging world.

    Resistance is essential.

  9. Squirrel

    Drawing this issue to the attention of investors not already cognisant of it may be useful, but it does assume genuine, consistent and sustained international action to “meet the internationally-agreed two degree global warming limit” (the latter quote from the Australia Institute webpage about this report).

  10. DaveR

    Just the same rubbish as the radical green groups are pushing right now in the UK and Europe. Its obviously globally coordinated (by whom?).

    And this analysis is timed to coincide with the cyclical low in resource equity valuations, which makes the sector look less important than it is. Fossil-fuel stocks are just one segment of the market that have cyclical performance. If you pick a peak price to a trough price (half cycle) – as they have done – you minimise the performance of the sector. If however, you look over the cycle, and pick peak-to-peak or mid-to-mid points, then you soon see there is a major contribution from these stocks at a time when other sectors fall.

    Green smoke and mirrors carefully disguised as objective research.

  11. faust

    Seriously, Sinc, a tracking error of 0.88% and the world is coming to an end that requires this post? Of course there will be a tracking error for a sample portfolio!

  12. cohenite

    Green investments have NO value beyond what ideologically driven taxpayer funded subsidies provide to them. Any other analysis is gilding the dead head of a fish.

  13. Andrew

    So basically they’re saying that in the worst period in history – which contained a GFC (which disproportionately hit the sector), a Petroleum Rent Tax, the WBCT, and a Green-Left govt for 6 of those years with an explicit aim of killing any extraction (conventional or frac) the sector STILL kept up?? Wow – must be a spectacularly good investment now!

  14. Pickles

    Went through Castlemaine in country Vic yesterday. There’s a big banner in the main drag on a pub verandah promoting this divesting stuff. Seemed strange until I saw a poster advertising some event at which Robert Manne is speaking this weekend in company with other assorted luminaries. Must be that kinda town.

  15. David Brewer

    The actual report by the Australia Institute is here: https://s3.amazonaws.com/s3.350.org/images/Climate_Proofing_Your_Investments_final.pdf

    Full of drivel, but worth a look to see what they are up to.

    Its own bottom line: screening out their Tiers 1 and 2 – the 21 serious fossil fuelers in the ASX200 – reduces your return by “only” 0.14%. Sorry I can’t be bothered working out this group’s relative market capitalisation, but say it’s pro rata, 21/200, or 10.5% of the total. That means that by investing ONLY in the 21 serious fossil fuel stocks, you could boost your return by 1.3%. Buy carbon!

    They also have a Tier 3 and Tier 4 which include market heavyweights like BHP, Rio Tinto and the Commonwealth Bank. But strangely enough they don’t quote a figure for the losses you would incur by avoiding these purgatory-level sinners.

  16. gabrianga

    Must phone the trusty Lord Wentworth and confirm Goldman’s position on buying “green” shares.

  17. .

    What is the CAPM model for green shares alone?

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