Report: Little Portfolio Risk in Dropping Fossil Fuel Holdings

A report by Aperio Group finds that the risk among endowments to divest from coal and major carbon producing industries can be negligible.

(January 29, 2013) — University endowments are increasingly questioning the role of fossil fuel-related companies in their portfolios, with some choosing to divest from them completely.

But one analysis by the Aperio Group, an investment-management firm that offers its clients a “socially responsible index,” has found that divesting from fossil-fuel companies does not necessarily add or detract value with regards to a university endowment. Rather, according to its research–titled “Do the Investment Math: Building a Carbon-Free Portfolio”–such divestment increases the risk to investors at such a modest level as to be negligible.

The research was headed by Aperio Group CIO Patrick Geddes, who studied the impact of 1) the so-called ‘Filthy 15,’ a group of coal utility and extraction companies designated by the university coal divestment campaign as the dirtiest public companies to hold, and 2) the exclusion of the entire industry of oil, gas, and consumable fuels.

As outlined by the study, the impact of removing all of the oil, gas, and consumable fuels industry results in forecasted tracking error versus the Russell 3000 of only 0.60%, which adds incremental portfolio risk of 0.01%. “The more narrow divestment of just the ‘Filthy 15’ results in a tracking error of only 0.14% with an incremental risk of 0.0006%.”

Want the latest institutional investment industry
news and insights? Sign up for CIO newsletters.

According to Dan Apfel of the Responsible Endowments Coalition, “This report answers the critical question that students and university endowments have been asking: ‘Can we divest from fossil fuels without incurring additional risk?’ Now we have the math to show that carbon divestment is not just good for people and planet, but can have negligible impact on risk or profit.”

Andrew Behar CEO of As You Sow, a nonprofit organization that promotes corporate responsibility, stated: “The critical issue is aligning mission with investing. We are seeing the emergence of a powerful voice from a generation declaring that the extraction and combustion of fossil fuels threatens their future and therefore should not be financially supported. This report shows endowment trustees that they can fulfill their fiduciary duty by opting out of fossil fuel investments without incurring additional risk.”

The report comes as student groups at hundreds of colleges in the United States have been urging their universities’ endowments to divest from fossil-fuel companies in recent months. In November, for example, more than 70% of Harvard University’s roughly 3,600 undergraduate students voted to ditch fossil fuel investments from the school’s endowment. “Members of the Corporation Committee on Shareholder Responsibility will meet with students this semester to discuss endowment investment policies and the students’ concerns regarding fossil fuels,” Harvard University spokesperson Kevin Galvin said. He added that Harvard operates with a “strong presumption against divestment” from any industry.

Smaller institutions, such as Vermont-based Middlebury College, have also been vocal about the divestment.

Read Aperio Group’s full report here.

Bestinvest: The Worst Performing Investment Funds

It’s a race to the bottom on the UK advisory’s controversial list, which ranks funds by underperformance over the last three years.

(January 29, 2013) — One bad year won’t land a manager on Bestinvest’s list of “dog” funds—but three years might. 

The London-based advisory has published the 2013 edition of Spot the Dog, or, as Bestinvest refers to it, “the guide fund managers would love to ban.” The firm only analyzes funds open to retail investors—hedge fund managers, you can relax now—and divides funds by the regions and the types of stocks they invest in. Each category (UK Equity Income, Global Emerging, North American etc.) has its own benchmark, which funds have to underperform by at least 10% three years running to qualify as “dogs.” 

For those uncomfortably familiar with some of the funds below from their own portfolios, Bestinvest stresses that “Spot the Dog is not a sell list,” nor does it project future earnings. But they say investors should take a hard look at the dogs in their portfolios for indications that performance may pick up. 

“Some funds have distinctive styles or investment approaches that can go through periods that are deeply out of step with the current markets, but could be about to come back into favor,” the report points out. “Some managers are better suited to tougher times, others to rising markets.” Or, the report notes, action may be already underway to improve performance. “For example if a new fund manager with a strong, proven track record elsewhere is appointed” or a new investment approach has been “applied to a fund that has historically underperformed, performance could be turned around.” 

Want the latest institutional investment industry
news and insights? Sign up for CIO newsletters.

The fortunes of investment funds do vary significantly from year to year, both for better and the worse. Last year, Edinburgh-based management firm Baillie Gifford had no mention in Spot the Dog. This year, three of the company’s funds made the lists, and Bestinvest compares one of its small and struggling portfolios to a Shih Tzu. 

Scottish Widows and its investment partnership arm once again took the top spot among management companies, with four funds qualifying for the list. BlackRock has the same number, but they manage much less investor capital. Of course, large asset managers with many funds are more likely to have dogs in the show. However, the report notes that several of the largest firms with broad fund ranges have no representatives on the list, including JP Morgan, BNY Mellon Asset Management, M&G Investments, AXA Investment Managers, and St James Place. 

The top spot on the lists goes the worst performer in each category, with returns improving as you move down.

 

The Bottom Five: UK General Funds 

 1. Standard Life UK Opportunities 

 2. Legal & General Growth 

 3. SWIP UK Opportunities 

 4. Blackrock UK Dynamic 

 5. Legal & General UK Active Opportunities 

 Top performer in the category: Liontrust Special Situations 

 

The Bottom Five: North American Funds

 1. Investec American 

 2. Legg Mason US Equity 

 3. Blackrock US Opportunities 

 4. Kames American Equity 

 5. Neptune US Opportunities 

 Top performer in the category: JPM US

The Bottom Five: Global Emerging Markets Funds 

 1. IM Hexam Global Emerging Markets 

 2. Templeton Global Emerging Markets 

 3. Baillie Gifford Emerging Markets Leading Companies 

 4. Baring Emerging Markets 

 5. Baillie Gifford Emerging Markets Growth 

 Top performer in the category: First State Global Emerging Markets Leaders

 

The Bottom Ten: Global Funds 

 1. Allianz Global Ecotrends 

 2. IM WHEB Sustainability 

 3. Schroder Global Climate Change 

 4. Scottish Mutual International Growth 

 5. Premier Global Strategic Growth 

 6. Kames Global Equity 

 7. UBS Global Optimal 

 8. Jupiter Ecology 

 9. Premier Global Alpha Growth 

 10. Henderson Global Care Growth 

 Top performer in the category: Aberdeen World Equity

 

   

«