Wednesday, 2 November 2016

Pennine Positive Portfolio becomes First Managed Fund Portfolio Service to Measure Impact

'Impact' is becoming a much used (and abused) term in the field of investing for positive outcomes. The clearest example of this is the BSF Impact World Equity Fund that lists mining, oil and tobacco companies among its many holdings. Everything has an impact but surely this one isn't positive! 

Other funds and managed portfolio services claim to invest positively, but how true is this in reality?  With the notable exceptions of Wheb, Threadneedle and Impax, listed funds have a woeful record of systematic reporting on their social and environmental impacts, tending to cite examples of holdings with a positive impact. This can be highly misleading, as the overall impact can be rather less compelling.  The financial industry is very good at reporting on geographic diversification, asset allocation and financial factors, so if funds are serious about positive impact, why don't they apply a similarly analytical approach to impact?

It gets a bit more complicated for managed portfolios of funds, because it requires analysis of each underlying fund.  3D Investing has undertaken what we believe is the first systematic analysis of impact of a portfolio of funds, in order to demonstrate the extent of any positive impact. We've done this by classifying each underlying holding in every fund held within the portfolio. This has allowed us to determine what percentage of the portfolio is held in positive impact areas including renewable energy, healthcare, low carbon transport and social infrastructure.

The Positive Pennine Portfolio 4 invests almost half in positive solutions

This demonstrates the difference to a conventional portfolio.  The Positive Pennine Portfolio is shown to invest 46% in solutions to social and environmental challenges whilst the FTSE100 invests 14% and also holds 27% of the portfolio in unsustainable companies, whilst the Positive Pennine Portfolio holds none.

The FTSE100 invests just 14% in positive solutions and 27% in unsustainable companies

The report seeks to present a balanced picture that doesn't just focus on the positive impacts but highlights any potential negative issues.

This makes for transparent reporting that properly demonstrates the true social and environmental impacts of a portfolio. We are delighted to be able to partner with Pennine Wealth Management in producing impact reports and hope to develop this further in the future.  The full report can be downloaded from Pennine's web site.

Wednesday, 6 July 2016

3D Funds Benefit from Brexit

So Brexit has happened but how has this affected the funds in the 3D Portfolio universe that seek to maximise social impact whilst minimising ethical compromise?  After an initial slump, global stockmarkets have shrugged off Brexit, rising across the board, but smaller UK companies have fared less well, with the big gainers being international exporters based in the UK who have benefitted from the fall in Sterling.  These macro factors have been positive for the 3D portfolio funds, especially the global funds which have risen slightly more than the average global equity fund since Brexit, a rise of more than 8%.

The UK picture is more mixed but two of the three selected 3D funds have more or less matched the UK Equity Sector which initially fell but has now recovered to just above its level before Brexit. The Alliance Trust Ethical Fund has performed less well, having fallen due its lack of exposure to pharmaceuticals and focus on smaller companies.  This is also true for other UK ethical funds which have suffered a significant fall by virtue of their focus on small and medium sized companies.
Moving to UK corporate bond funds, these have risen slightly in line with the sector, with rising demand for low risk assets.

Property has been one of the big casualties of Brexit with concern over a withdrawal of international investors. For example, REIT British Land is down more than a quarter 23 June, and general property funds have been closed as investors clamour for the exit.   Against this background our chosen specialist property funds have held up very well as these are far less influenced by international investment and are underpinned by long-term government backed rental streams.  Performance has been flat which looks very good against falls of 25% or more.

The social and environmental infrastructure funds have also held up rather well, with performance having been more or less flat or slightly down.

Clearly, in the long term the impact may be more profound, but the good news is that in the immediate aftermath, 3D Portfolios have been beneficiaries of Brexit. For more information on 3D Investing and Portfolios download the latest 3D Investing Presentation

Thursday, 28 January 2016

Investing in clean energy - the low risk way

Clean energy has been one of the darlings of the sustainable investment world, at least in terms of investor demand.  Its something that every socially motivated investor wants to have in their portfolio, but until relatively recently, it has proven an almost unmitigated disaster area for investors.

Even now, most clean energy funds are languishing below the level they were 5 years ago, most significantly down in value.  Those that have limited the losses have only done so by diversifying into natural gas and stocks not directly related to clean energy.  And individual shares in the sector have been even more volatile. Vestas Wind, one of the leading wind turbine manufacturers is typical:

It may be that clean energy investment will prove to be highly profitable over the decades ahead, but the last decade has not been encouraging and this sort of volatility does not sit well in most people's portfolios.  So are there any alternatives and if so, are they worthy of consideration? I believe there are, and I'd like to highlight two ways of investing in renewable energy without being exposed to the volatility of clean energy equities.

The first is via environmental infrastructure funds.  These are a relatively recent phenomenon in the UK, and consist of large portfolios of renewable energy assets, often already operational and with long-term, relatively secure contracts for the energy they produce.  This removes much of the risk of planning and development, albeit with lower potential returns.  Typically, these funds are structured as investment trusts with a target initial yield of around 6% that is expected to grow in line with inflation.  Borrowings are secured for periods similar to the expected lifetime of energy generation, and income is underpinned by long term agreements, often in association with Government incentives.  All of this makes infrastructure funds a less risky way of investing in clean energy, albeit without the potential upside offered by renewable energy equities.  That said, an inflation linked dividend of 6% isn't to be sneezed at, especially when there is the potential for modest capital growth on top of that.  I suspect that many, if not most investors, would rather accept a lower overall return than take on a high level of volatility.

Most of the funds trade at a modest discount to their net asset value, and are either wholly focused on one form of clean energy (wind or solar), or a combination.  The table below summarises those available in the UK.  All of these funds are now paying dividends of 5.5% or more, supported by predictable revenue streams from operational assets.

There are also a number of funds that invest in environmental assets, of which a large proportion is invested in renewable energy.

The other way of investing in clean energy that I'd like to highlight is community share issues.  These are promoted as social investments as indeed they are, but they also offer long term income streams that might be considered to be less volatile than investing directly in listed companies.  There have been a proliferation of such investments over the past few years, boosted by Government tax incentives.  These took some of the risk our of investment by providing generous tax relief up front and with the maturation of the industry, the Government now considers that this is no longer appropriate.  Although disappointing, the withdrawal of tax relief is testament to the predictable nature of the income streams and the lowered risk of this type of investment.   The number of new solar investments has diminished sharply but there are still opportunities for both solar and wind investments in community based projects.  There are two very good community investment sites that facilitate investment in these type of projects.

The first is Ethex, a partner of 3D Investing.  Ethex makes positive investing easy to understand and do, providing a direct and personal way for individuals to invest in businesses they believe in.  It does this by providing in depth social and financial profiles that enable comparison of the investments.  Investment can then be made online in a simple and straightforward way.  Current offers include:

A 3 year bond paying 6% interest to finance new solar energy projects in the Bristol area.

A 2 year bond paying 5.5% interest to purchase the assets of a solar Community Interest Company.

 Shares in a Community Benefit Society with a forecast return of 6-8%, derived from investing in two community owned wind turbines.

The second portal for community energy investment is Abundance.  Abundance is wholly focused on community energy investment and offers peer-to-peer investments in long term debentures.  Most notably, Abundance has pioneered a pretty unique financing model, whereby the majority of investments offer the repayment of capital and interest every six months throughout the term of the investment.  So far, £1,241,437 has been paid back to investors by way of capital repayments and interest on £14,771,983 capital raised, offering proof of the business model.

Furthermore, it provides a secondary market in investments with £178,511 having been traded already.  This is very encouraging as these types of investment having historically proven to be very illiquid with poorly functioning secondary markets. 

Abundance has also enabled investment through a pension.  This is to be lauded as these investments generate long term income flows that match the required profile of an investor seeking income in retirement, or for whom the long term predictability of returns is highly desirable.  The usual financial caveats apply, but this is a very significant development.  Well done, Abundance.