Scottish Mortgage Trust Report and Shell Climate Change Votes

The Scottish Mortgage Investment Trust (SMT) recently published their Annual Report and it’s well worth reading bearing in mind the exceptional performance they achieved last year. NAV total return was up 111% and that was way ahead of the global sector average. It was the best ever performance of the trust since it was founded in 1909 and it’s now one of the largest investment trusts.

How did they achieve such a remarkable result? You might think it was because of a strong focus on technology stocks – but that is only 23% of their portfolio. Perhaps you think it was because they made big bets on a few well-known names such as Tencent, Illumina, Amazon and Tesla? But that is not the case.

It is true that Amazon represented 9.3% of the portfolio at the start of the year and Tesla 8.6% but the 30 largest holdings only represented 80% of the portfolio. In other words, it was in essence a large and diversified portfolio. But a few stocks made a large contribution to overall performance with Tesla contributing 36% despite the trust selling 80% of their holding during the year so as to maintain diversification.

In his closing words, fund manager James Anderson suggests that he should have been more adventurous. He says “we have to be willing to embrace unreasonable propositions and unreasonable people in order to make extraordinary findings….”. He discounts the value of near-term price/earnings ratios – understanding how the world is changing seems to be his main focus.

Another share that many private investors hold is oil company Shell (RDSB) who recently held their Annual General Meeting. If you don’t hold it directly you might hold it indirectly as it’s usually a big holding in global generalist funds and trusts.

There were two resolutions on the agenda related to climate change one by the company asking for support for their “Energy transition strategy” and one requisition from campaign group Follow This. The latter demanded more specific targets to achieve reduction in long-term greenhouse gas emissions. The company’s resolution received 89% votes FOR, but the latter achieved 30% FOR. Even so that was higher than previous votes, or similar resolutions at other oil companies with support from proxy advisory services and big institutions.

Even the company’s resolution, supported by a 36-page document and which was only “advisory” includes reference to Scope 3 emissions (i.e. those emitted by their customers using their products). They say “That means offering them the low-carbon products and services they need such as renewable electricity, biofuels, hydrogen, carbon capture and storage and nature-based offsets”.

Are these proposals likely to be effective or substantially contribute to climate change? I think not when China and other countries continue to build coal-fired power stations and many people question whether it’s possible to change the climate by restricting CO2 emissions. These resolutions look like virtue signalling by major investors and may be financially damaging to Shell. It is particularly unreasonable to expect Shell’s customers to swap to other energy sources – they may simply switch to other suppliers if they can’t buy them from Shell. As the Shell report says: “If we moved too far ahead of society, it is likely that we would be making products that our customers are unable or unwilling to buy”.

Shell says that “Eventually, low-carbon products will replace the higher carbon products that we sell today”, but their report is remarkably short on the financial impact. In fact their report reads more like a PR document than a business plan and it also makes clear that projecting 30 years ahead is downright impossible with any accuracy.

Note: I hold Scottish Mortgage but not Shell. I do not hold any oil companies partly because they are exploiting a limited resource making exploration and production costs more expensive as time passes and partly because I see a witch-hunt by the environmental lobbyists against such businesses. I also dislike companies dependent on the price of commodities and vulnerable to Government regulation which Shell certainly is on both counts.

One interesting question is who owns and runs the Follow This campaign and how is it financed? Their web site is remarkably opaque on those questions. Even if they have been remarkably effective in getting media coverage for their activities, I would want a lot more information on them before supporting the resolutions they advocate.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Frying in Hell and Investing in Oil Companies

Last night and this morning, the national media were dominated by the news from the Intergovernmental Panel on Climate Change that we are all going to fry in a rapidly rising world temperature unless we change our ways. CO2 emissions continue to rise and even to limit temperature rises to 1.5 degrees Celsius requires unprecedented changes to many aspects of our lives.

The suggested solutions are changes to transport to cut emissions, e.g. electric cars, eating less meat, growing more trees, ceasing the use of gas for heating and other major revolutions in the way we live.

So one question for investors is should we divest ourselves of holdings in fossil fuel companies? Not many UK investors hold shares in coal mines – the best time to invest in coal was in the 18th and 19th century. That industry is undoubtedly in decline in many countries although some like China have seen increased coal production where it is still financially competitive. See https://ourworldindata.org/fossil-fuels for some data on trends.

But I thought I would take a look at a couple of the world’s largest oil companies – BP and Shell. How have they been doing of late? Looking at the last 5 years financial figures and taking an average of the Return on Assets reported by Stockopedia, the figures are 2.86% per annum for Shell and 0.06% per annum for BP – the latter being hit by the Gulf oil spill disaster of course. They bounce up and down over the years based on the price of oil, but are these figures ones that would encourage you to purchase shares in these businesses? The answer is surely no.

The figures are the result of oil exploration and production becoming more difficult, and in the case of BP, having to take more risks to exploit difficult to access reserves. It does not seem to me that those trends are likely to change.

Even if politicians ignore the call to cut CO2 emissions, which I suspect they will ultimately not do, for investors there are surely better propositions to look at. Even electric cars look more attractive as investments although buying shares in Tesla might be a tricky one, even if buying their cars might be justified. Personally, I prefer to invest in companies that generate a return on capital of more than 15% per annum, so I won’t be investing in oil companies anytime soon.

But one aspect that totally baffles me about the global warming scare is why the scientists and politicians ignore the underlying issue. Namely that there are too many people emitting too much air pollution. The level of CO2 and other atmospheric emissions are directly related to the number of people in this world. More people generate more demand for travel, consume more food, require more heating and lighting and require more infrastructure to house them (construction generates a lot of emissions alone). But there are no calls to cut population or even reduce its growth. Why does everyone shy away from this simple solution to the problem?

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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