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INVESTMENT: Damage Limitation, Reducing Your Exposure to Fossil Fuel Volatility
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Damage Limitation

Reducing Your Exposure to Fossil Fuel Volatility

By Michael Dow

BT 201512 070 01 Investment 003Up until the last year or so, fossil fuels -€“ natural gas, coal and crude oil derivatives -€“ were considered by many to be a pretty safe bet. And for good reason, demand from emerging markets like China, India and Indonesia was soaring, while efforts to create a sustainable, alternative source that was price competitive never quite came to fruition in any serious way. It looked like the so-called commodity super-cycle was here to stay for a very long time to come.


Then, of course, in 2014 the proverbial well and truly started to hit the fan. Those seemingly unstoppable emerging market giants started to slow down, while Europe and North America took a few turns for the worse. On top of all that, there was the double whammy of geopolitical turbulence in the Crimea and Middle East. The end result for commodity investors has been a dramatic price slump that has hit many investment portfolios like a high-speed train.


The sad reality is that the investors who jumped on board the fossil fuel band wagon a few years ago are now stuck in a very scary situation. A few months ago, even after OPEC surprisingly decided not to slash supply it looked like oil prices might finally have turned the corner and started to edge back upwards. Unfortunately, though, the pains associated with rock bottom prices linger. If you are still banking on a sudden surge in global demand for fossil fuels, then now is the time to admit defeat and rethink your investment strategy!


Now before you get the wrong idea about this article, the aim is not to jump on the band wagon of the global fossil fuel divestment campaign that has been raging on for years. It goes without saying that we all want to help the environment by encouraging the growth of a newer and cleaner energy source, but the goal here is to explore some of the ways an individual investor can get more bang for their buck in the energy sector. With that in mind, the first important point to make is that completely exiting the fuel or energy sector right now - due to fears over persistently rock bottom crude oil prices -€“ would be short-sighted and silly. After all, humans and machines need to get energy from somewhere, even if it doesn'€™t involve guzzling fossil fuels.


As always, the key to making money in this rapidly changing sector is to either find the right individual opportunities or the right cash-generating conduits (i.e. actively managed funds or ETFs). Individuals who are fortunate enough to have a net worth of over a million U.S. dollars have the option of investing in ethically-minded Generation Investment Management. If the latest analysis is anything to go by, then this London-based firm -- which is fronted by die-hard environment advocate Al Gore -- has done pretty well for investors in recent years. However, for those of us with much smaller sums of cash to play around with, the good news is that there are also plenty of options out there.


BT 201512 070 03 Investment 003One such opportunity is a newly-approved exchange traded fund (ETF) called the Ethno Climate Leadership Index (Trading symbol ECLI on the New York Stock Exchange). By all accounts this ETF could turn out to be an absolute gem of an investment in the coming years, as more and more institutional and individual investors divest from fossil fuels. There are lots of other, well-established ETFs and mutual funds to choose from. ECLI is one of just a dozen or so investment instruments that offers retail investors broader exposure to investing in the U.S. or global public companies, while excluding the 200 coal, oil and gas companies that are part of the Carbon Underground -- a list used as a guidepost by divestment advocates. "€œDivestment, while spreading wildly, isn'€™t mainstream - yet,"€ says Leslie Samuelrich, the president of Green Century Capital Management and a divestment advocate. Green Century, which was established in 1991 by environmental groups, offers two diversified mutual funds -- the Green Century Equity Fund and the Green Century Balanced Fund --that have sold all of their coal, oil and gas holdings.


In addition to the aforementioned options, there is another fossil-free ETF called '€˜Give'€™, which was launched in 2012 by partners including Philippe Cousteau, the grandson of the late ocean explorer Jacques-Yves Cousteau. "€œI wanted to create something that everyone could participate in, not just wealthy, accredited investors,"€ Cousteau told Green Money Journal. And, in that sense, this fund does exactly what it says on the tin, so to speak. It offers everybody an opportunity to get involved in ethical investing.


At this point you might be thinking to yourself: "investing in alternative energy ETFs is all well and good but can I make a return?" According to an indepth article by The Guardian's Mark Gunther, the answer is a resounding 'yes'. He says that "increasingly, there's evidence that well-constructed fossil-free portfolios can match or even outperform those that include coal, oil and gas companies... An analysis by MSCI, which manages global indexes, found that a global fossil fuel-free index earned an average return of 13% a year since 2010, better than the 11.8% annual return earned by a conventional index. Of course, past performance is no assurance of future returns; a period of rising energy prices could propel fossil fuels ahead of the overall market".


BT 201512 070 02 Investment 001So moving from fossil fuels towards other forms of energy is pretty easy when you know how, but it isn'€™t the only thing savvy investors need to do in order to get their financial house in order. They also of course need to consider a big rethink of their asset allocation strategy in light of current global economic circumstances. With the prospect of a further slowdown in China and the emerging markets, the uncertainty of higher U.S. interest rates and another few years of stagnation in Europe, it'€™s no good trying to guess where energy prices are going to be in two years time, or even by the end of the decade.


Instead of taking speculative gambles in a very uncertain macroeconomic and geopolitical environment, investors would be well-advised to think long-term and look for real value investments that can provide both protection against volatility and relatively safe returns. Diversification both across and within different sectors, including energy, is incredibly important in this regard. So too is ensuring that your portfolio is giving you a steady amount of dividend and/or interest income to cushion you from any persisting bear market conditions.


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