Sustainability doesn't Suck: Part One
Sustainable investments are available in many markets. At Beckon, we focus on the SME, Property and non-listed sectors that have sustainable futures and returns, but it is interesting to explore what sustainable investments have traditionally stood for in public and listed markets. Many investments have proven their sustainability before the term became popular and well before the development of ESG analysis or the United Nations SDGs, which are themselves only five years old. https://www.un.org/sustainabledevelopment/sustainable-development-goals/
How does one define a sustainable investment? The core tenet of a sustainable investment is that your investment capital remains intact. Gold may be the most sustainable of all investments given it has maintained a store of value for literally thousands of years. Gold was first used as coinage in the late 8th Century BCE whilst the Ancient Egyptians used Gold for jewellery circa 5000 BCE.
Gold Price in USD 1972 – now Source Refinitiv
Sustainable Investment Returns
Has a Gold Investment generated sustainable investment returns? Yes and no. There will be period where the price of any asset will fall as the chart above shows. However, there was a 25-year period from the early 1980s when the Gold price traded sideways and produced no returns. In fact, Gold returns were negative; as the opportunity cost of holding Gold having been the interest forgone as US rates were between two and 12% during that period. While Gold maintained a store of value for ~25 years it produced negative returns.
US Fed Funds rate 1972-present Source Refinitiv
Oil vs Gold sustainability (using Cushing FOB price). Oil has gone through the peak oil supply phase and now the peak oil demand phase. Sustainability factors change over time, with climate change now a driving factor. Oil has not produced sustainable returns.
To define a sustainable investment return, one has to define a time period over which to measure the returns. Financial assets have generated longer term, positive returns as demonstrated by the following chart from the early 1980s. US 10-year rates are in purple and the S+P 500 is the gold line.
If we define a sustainable investment return period as 10 years, there are periods when the S+P 500 has generated significantly negative returns. The green line in the chart below shows the rolling 10- year return on the S+P500, while the blue line represents the rolling 10-year return on 10-year US T notes.
Sustainable returns are also dependent on the purchase price of an asset.
Australian financial assets have not generated as consistent returns as their US equivalents on a five or 10-year rolling return basis (interest and dividend income is not included). Does that imply Australian financial assets do not generate as sustainable returns? Again, the answer is yes and no.
Composition of a sustainable investment
Gold is a sustainable asset as its composition has remained the same and it has maintained a store of value (different to price). Government Bonds by and large have remained the same over decades and have generated sustainable returns for most of their lifespan. Equity indices however, are dynamic and their components change regularly.
There is a survivor bias as indices’ components are continually reviewed and replaced to represent that dominant sectors of the US economy. Does this make the returns more sustainable? Yes and no.
In Australia five of the top 10 listed stocks by market capitalisation from 1978 are still in the top 10 today, six if we include Rio Tinto. This would seem to fit the definition of a sustainable investment. There were three mining companies in the top 10 in 1978 and there are three today. Are they now more or less sustainable? There were three banks in 1978 (Westpac was Bank of NSW) and with the privatisation of CBA there are four today. Does this make Australian stocks more sustainable? Yes and no depending on the company.
Are current prices in asset markets conducive to sustainable returns?
We are in a bull market in everything phase; stocks, property, commodities and crypto with many of the asset’s classes at all-time highs. This will naturally lend itself to investors extrapolating positive returns into the future at a price and sentiment extreme.
Are current asset prices inducive to generating long term sustainable returns? Central Banks are not removing the punchbowl (raising rates); they are in fact spiking the punch with promises of low rates for extended periods of time. Given their forecasting is as fraught with uncertainty as everyone else’s, this seems a bold call. Does this lead to sustainable returns? QE as a policy tool has been proven to create longer term financial returns in certain countries but not in others. The differing impact of QE on asset prices will be explored in a future post. For now, all I ask is whether the current policy settings are sustainable. I would argue they are not, but this will depend on your time frame. One year? Sure. Five years? Maybe. 10 years? No chance. My crystal ball is even more cloudy than those used by the Central Banks. What have we learned about sustainable assets and returns?
Sustainability needs to relate to a particular period, as do sustainable returns.
Sustainable returns have been delivered by various asset classes.
Some individual equities have provided sustainability, as has an adaptive index such as the S+P 500. However, this doesn’t apply to all individual equities or even indices (Japan).
Macro policy settings impact all returns.
Sustainable returns are dependent on the price at which an asset is purchased.
I will explore the sustainability of property and SMEs in a future post.
Beckon Capital is an impact investor. We believe sustainability comes from monitoring the total impact of your business and using those inputs to create sustainable returns. We invest on a five to 10-year time frame, in businesses we believe will grow through changing macro policy conditions. We will launch our second diversified fund of sustainable SMEs in Q1, 2021.
Beckon Capital Pty Limited (ABN 49 628 013 678), authorised representative No. 001280538 of Fundhost Limited (ABN 69 092 517 087, AFSL No. 233045) (“Beckon”)