Environment | Slack Investor

The World According to GARP ETF

Slack Investor has never seen the film, though well reviewed, but he did struggle through the complex book by John Irving in the late eighties. His interest in GARP has been rekindled by a new ‘Smart Beta’ ETF that has been floated by Global X in October 2024. This one is fresh!

Smart Beta refers to an enhanced indexing strategy that seeks to exploit certain performance factors in an attempt to outperform a benchmark index – Fidelity

This is good … is it possible to get the benefits of passive investing with some of the advantages of active investing strategies? Can you have low fees with better performance than benchmarks? Perhaps all the hard work in selecting growth stocks can be done with a financial selection algorithm and Slack Investor can get back to the couch.

Global X S&P World ex Australia GARP ETF

Exposure to companies with robust earnings growth and solid financial strength trading at reasonable valuations – Global X S&P World ex Australia GARP ETF

Growth at A Reasonable Price (GARP) … in an ETF … am I dreaming? Is this too good to be true? Ahh … there is a management fee. But, it’s 0.3%. Not bad for a fund that has some selection smarts plus international exposure. There is a lot to like about this ETF.

Selection Process for GARP ETF

The GARP ETF tracks the S&P WORLD EX-AUSTRALIA GARP INDEX using a rules based stock section process. From the global shares universe, all companies are assigned a Growth score for their previous 3-yr growth. Then there is a Quality score that combines company assets to debt ratio, return on equity (ROE), and the earnings to price ratio (Inverse of P/E Ratio).

Once the ranking is complete, shares are selected that score highly in both categories and some restrictions on exposure to individual shares and sectors is applied – Mark LaMonica, Morningstar

So, by weeding out some of the companies that are ‘unreasonably’ priced the top 250 global companies are selected according to GARP principles. The price (P/E Ratio) filter should help mitigate the portfolio downside in a market downturn.

Performance

The GARP ASX ETF has only been running a month but Morningstar has gathered some data based upon the GARP principles over time.

GARP seems to perform better than the S&P 500 in some time frames, particularly in the periods that include a share crash. The 5-yr period includes the 2020 ‘Covid Crash’ and, the 20-yr frame includes the 2007–2008 financial crisis (GFC). But these are just index values – without fees. When you factor in the GARP management fee of 0.3% compared to the iShares S&P 500 ETF (IVV.ASX) fees of 0.04%, the outperformance of GARP does not look as good.

Top 15 Holdings GARP

There are a lot of tech companies in here but also some consumer discretionary stocks. Some of the more expensive (high P/E ratios) tech companies must have been filtered out by the GARP process. It is only when Slack Investor takes a closer look at these companies that he starts to get ‘cold feet’. Overall, Slack Investor thinks this is a good package to get exposure to reasonably priced growth companies. Two things that hinder Slack Investor from investing are :

The overlap in holdings to some of the ETF’s that he already owns. e.g. Betashares Nasdaq 100 ETF (NDQ.ASX) and Betashares Global Quality Leaders ETF (QLTY.ASX) – a purchase of this ETF would not really add to the diversity of his share ownership
In the the top 15 holdings, there are 3 Petrochemical companies – Exxon, Chevron and Shell.

Slack Investor will admit to some hypocrisy here. He owns a 15-yr old petrol driven car and regularly uses jet fuel to get to far away places. On the plus side, his roof is making renewable energy. However, the world is getting hotter and he’s aware that we must continue to work toward phasing out the use of fossil fuels. Are you listening Donald?

Slack Investor is a part owner of all types of companies through index and broad market ETF’s (e.g. VGS, STW, S&P 500 Index, etc). However, he has a ‘piddly’ moral stance of trying not to bundle into the Slack Portfolio any ETF’s that actively select higher proportions of Tobacco, Gambling or Fossil Fuel companies.

Is this making a better world? Probably not. But, leave Slack Investor alone to pursue his token activism – no harm done. Besides, it’s likely to be better than doing nothing. This is a personal thing and, Slack Investor encourages all investors to take on any sort of investment stance that feels right for them – providing it is profitable in the long term.

Imperfections in the Brickwork and … December 2022 – End of Month Update

Detail from the Pen and Ink “Behind Armstrong Street Shops” – the remarkably talented Bren Luke, 2022.

Slack Investor is always on the lookout for new investments … and nothing attracts the jaundiced Slack Eye more quickly than continuous long term results.

Brickworks Ltd (BKW:ASX) have just had their AGM presentation. I was very impressed by the claim that they have maintained, or increased, normal dividends for the last 46 years!

Dividend record – Brickworks 2022 AGM presentation – Brickworks

Tracking the share price of BWK:ASX since 1968 – Brickworks 2022 AGM presentation – Brickworks

As well as being a very good maker of bricks, Brickworks operates as an investment company and own a 26.1% stake of the diversified investing house Washington H. Soul Pattinson (SOL:ASX). SOL, in turn have holdings in

TPG Telecom – Australian telecommunications provider
Brickworks Limited – Clay and concrete production for the construction industry
New Hope Group – Coal and oil mining and energy generation
Tuas Limited – Telecommunications provider
Apex Healthcare Berhard – Malaysia-based pharmaceutical production
Pengana Capital Group Limited – Fund management
Aeris Resources – Mining and exploration activities

Now Slack Investor does not want to get all preachy here, as as everyone has to draw their own line in the sand – These things are very subjective. I looked up New Hope Mining on the excellent Morningstar Sustainalytics site to get an idea on how well the company is ranked in terms of Environment Sustainability and Governance (ESG).

ESG Risk rating for New Hope Corp. Ltd. – from Sustainalytics

New Hope Group ranked 14571 out of 15559 in terms of ESG risk rating – on a worldwide basis. I personally would feel uncomfortable being a part owner of a thermal coal miner given the current state of the planet.

So despite the most excellent management and performance of BWK, while they still own an interest in the New Hope Group, I will look elsewhere for investments.

Puff Puff MOAT

On the subject of digging deep, I have been a long term holder of the VanEck Morningstar Wide Moat ETF (MOAT:ASX). Slack investor has many vices – Wine and beer just being just two of them … so again, I won’t lecture – as these things are very personal. However, some of the sins that my mother rubbed into me as being “particularly evil” are smoking and gambling. I will do my best to avoid ownership of these type of stocks in deference to my dear Mum.

I noticed back in 2021 that this MOAT ETF had Phillip Morris International as one of its top 10 holdings. According to the Yahoo Finance site – Phillip Morris is 2.5% of the MOAT holdings! Owning a part of a multinational tobacco company that is a leading part of Big Tobacco didn’t really sit well with Slack Investor.

According to the Global Burden of Disease Study, in 2015 alone, smoking caused more than one in ten deaths worldwide and killed more than 6 million people, resulting in a global loss of nearly 150 million disability-adjusted life-years
The Lancet

Slack Investor marked MOAT as an ETF to get rid of, despite liking the concept of its construction – “companies with sustainable competitive advantages”. I had a feeble attempt at shareholder activism and emailed VanEck about this … and enquired whether thy might screen the MOAT ETF with an ethical filter … to get rid of tobacco and gambling stocks – they replied with a polite “no”.

Modified (to protect the innocent!) email from VanEck to Slack Investor

I finally got around to attempt to sell MOAT this month and I thought I should just check the VanEck holdings MOAT site and look at their complete holdings list. Lo and behold … at 29/12/2022, Phillip Morris has now gone from their holdings list! So, for now, MOAT is a keeper!

If at a loose end during the holidays and need a distraction, Slack Investor highly recommends the free exhibition “Streets of Your Town” at the Ballarat Art Gallery, VIC. Bren Luke is an amazing artist, his exhibition runs till 5th Feb 2023.

December 2022 – End of Month Update

The year closes and, I’m not sure if Slack Investor was naughty (probably?)… but, there was no “Santa Rally” this month. All followed markets took a dive in December. The ASX 200 down 3.4%, the FTSE 100 down 1.6%, and the S&P 500 down 5.9%,

Due to the return of all followed share markets to more normal valuations, I have returned my stop-loss upper-limits to 15%. This means that when I work out my stop loss value, I add another 15% to it, this is my upper limit. If the stock price exceeds the upper limit, I will adjust my stop loss upwards. This method helps to lock in some gains if they occur.

Slack Investor remains IN for the FTSE 100, the ASX 200, and the US Index S&P 500.

All Index pages and charts have been updated to reflect the monthly changes – (ASX Index, UK Index, US Index). The quarterly updates to the Slack Portfolio have also been completed.

Is your democracy sausage a little warm?

Australia election: Fines, donkey votes and democracy sausages - BBC News

For those in far off lands, a “democracy sausage” is the exquisite mixture of sausage, onions and sauce wrapped in a slice of bread that you purchase from a charitable organizations as a “reward to self” after voting at an election booth in Australia. Australia is coming up to a national voting day on 21 May, 2022. This is a day I have always enjoyed as I exercise my democratic rights and vote. Although over half the world countries are designated as democracies, due to recent changes by national governments that curtail press freedoms and suppress dissent, there is the evaluation that less than 20 percent of the world’s people now live in a Free country!

But lets not get too depressed about things I have no control over. For now, Slack Investor does have a vote.

Fossil Fuels and Climate Change

For the progress of civilization, it seemed to be an excellent idea to use fossil fuels (Coal, oil and natural gas) to provide relatively cheap energy. These fuels took hundreds of millions of years to form as vast amounts of plant matter was converted into stored carbon.

Fossil fuels are non-renewable and currently supply around 80% of the world’s energy
Client Earth – February 2022

When we use these fuels for energy, the carbon combines with oxygen – and carbon dioxide is released. Carbon dioxide, is one of the “greenhouse gases”, that trap heat in our atmosphere, causing global warming.

The problem is, that we have managed to release huge amounts of the stored carbon dioxide in the relatively short time since the industrial revolution.

From an IPCC Report showing the rapid observed increase in global temperature since the industrial revolution – especially since the 1950’s – Climate Change 2021: The Physical Science Basis

Firstly, we must recognise that global warming is a real problem for our Earth. There is ample evidence of climate change leading to rising temperatures, rising sea levels, decreased cool season rainfall for southern and western Australia and increased weather-related disasters. Our current amount of warming due to the rapid release of these greenhouse gases is 1.1°C. Urgent action is required if we are to keep the warming below 1.5°C- We can all do our little bit to reduce our fossil fuel consumption – But real change must be led by our governments.

Emissions of greenhouse gases from human activities are responsible for approximately 1.1°C of warming since 1850-1900, and finds that averaged over the next 20 years, global temperature is expected to reach or exceed 1.5°C of warming
IPCC Report, August 2021 – Climate change widespread, rapid, and intensifying

With the Australian election looming, I am grateful to a timely Ross Gittins article and to Climate Analytics for doing the hard work of actually assessing the impact of the politician promises to help reduce greenhouse gases in order to reduce global warming. They assess Liberal party policies as leading to a warming of 3.0°C by 2030: Labour party policies consistent with a 2.0°C of warming; Teal Independents and Green party policies are consistent with a 1.5°C of warming.

Emission reductions for 2030 are very important if the
world is to have a reasonable chance of limiting warming
to 1.5°C, the long-term temperature goal of the Paris
agreement.
Climate Analytics

Climate Analytics analysis of the likely effect of of the major Australian political parties climate policies on Greenhouse gas levels and global warming.

If you think that climate change is an important issue. Think about your vote.

Slack Investor usually writes about financial matters – but a recent survey of Australian economists found that 74% of them rated “climate and the environment” as the most important issue for this up-coming election.

Also, what is the use of having a blog – if you cant have the occasional rant!

Here comes the Sun … It’s alright

The Beatles at Tittenhurst Park, 1969 – From Rolling Stone

It has been 53 years since the Beatles) recorded “Here Comes the Sun” from their landmark Abbey Road Album. It has been 18 months since Slack Investor installed Solar Panels on his roof and is in complete agreement with George Harrison … This Sun, “It’s alright”.

Here comes the sun
Here comes the sun,
And I say, It’s all right
From “Here Comes the Sun” – Songwriter: George Harrison

Always looking for distractions during the declining months of the stock market … and I can always rely on my solar panels for good news. Solar Choice evaluate solar panels in Melbourne (where I live) to have a 22% – 36% internal rate of return on your investment (that’s good!) – and then there is the mantra of “doing the least harm” by minimising fossil fuel use.

The road to Solar Panels

Firstly, great apologies to planet Earth that it has taken me 6 decades to harness some of the sun’s energy for my personal power use. But what is done is done .. and I am moving forward with the zeal of a reformer.

Like all big financial decisions, Slack Investor was not immune to procrastination. There is always an excuse not to act … ” I’ll wait till I pay off my mortgage”, ” I’ll wait till I get to my dream home”, etc. What I wished that I knew during these periods of hesitation was that solar panels on your roof does not only make environmental sense … but it makes great financial sense.

What is sadly missing in energy debates is an analysis of the “total environmental cost” of each way of producing energy. A 2021 report on production and environmental costs of various means of electricity generation in Europe revealed a compelling case to move to wind farms and solar panels to make electricity. This report does not seem to include the vital battery storage costs in its analysis, but another study found the use of solar panels with utility-scale battery storage will have at least 10 times less emissions and air quality impact compared with natural gas or coal for power generation.

A graphic comparing the cost of various energy sources, along with environmental and health costs

Slack Investor tries to do his homework before dipping into his wallet and, during his solar research, I came across a very informative website solarquotes.com.au. Not only can you find great information on solar energy, but they can arrange quotes from 3 local installers. The system is free to the homeowner – I have no affiliation except for the great satisfaction of using their service. Where I live in Victoria, Australia, the governments are encouraging of Solar Panels and offer incentives to install a solar panel system.

Solar Panels now on Roof

The hard part is always deciding on the detail and, after 3 quotes, only one installer actually climbed on our roof and assessed the shading of surrounding obstructions. I decided to reward this initiative and ended up with a

7.7 kW system
6 kW Inverter
22 x 350W panels
Solar Analytics Smart Monitor and lifetime subscription (Well worth it!)

The total cost was $10 906, but with the Australian government $3750 solar credits and the Victorian state government rebate of $1850, out of pocket costs were reduced to $5306

After 18 months, the first revelation to me was the daily variability of solar output of my system due to cloud and rain. The next revelation was the seasonal variability of the output. During winter, the sun is low and relatively weak – Summer is the time of peak production. The third revelation is the economies of using your own power rather than exporting to the grid due to a lower feed in tariff – but that analysis is worthy of a future blog.

The raw daily production of my solar panels in kWh during 2021, showing large daily and seasonal variation – The red line is the daily expected average of solar energy generated by my system – 27 kWh

The projections from my installer suggested a return on my investment after 4 years. The first hurdle is to recover the environmental cost of producing the raw metal, silicon and glass of these panels. With the increasing efficiency of solar panels, the environmental pay back period is between 1-2 years. The next hurdle is the financial costs including installer’s fees. My installer projected a break even point after 4 years.

Pleased to report that, after 18 months, everything is going according to expectations. Go Solar … good for planet … good for pocket … Slack Investor happy!