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:
Then some actual details:
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.