Fresh off ramming through some of the most restrictive oil and gas legislation in the country, climate activists have set their sights on Colorado’s pension fund, demanding that the Public Employees Retirement Association (PERA) completely divest from fossil fuels. They even claim to have numbers to show that it would actually improve the fund’s performance.
If this sounds like fantasy-fueled investing, it is.
350 Colorado – the state affiliate of international climate alarmist group 350.org – commissioned Corporate Knights to study the effects of oil and gas stocks on PERA’s portfolio. (Corporate Knights is a research firm based in Toronto advocating for “clean capitalism,” and publishing Corporate Knights magazine quarterly.)
They found that if, in July 2009, PERA had sold all of its stock in companies who earned a majority of their revenues in oil and gas, the portfolio would be $1.77 billion better off. Clearly, having Exxon Mobil in the portfolio is hurting returns. On that basis, 350 Colorado advocates divesting from oil and gas as a prudent investment decision.
The proposed policy not only ignores basic principles of portfolio management, it’s a recipe for the overt politicization of the state’s pension funds, opening the door to no end of mischief.
First, the time period they use for comparison is suspicious. There’s obviously an appeal to using a round number like 10 years, and picking a month right near the market low is also convenient. But it captures a period of time when the Energy Sector was remarkably weak compared to the S&P 500. Immediately prior to 2008, the Energy Sector had a span of 5 years where it out-performed the S&P 500; go back 30 years to 1989 – a benchmark span used by PERA itself – and energy was just starting an 8-year winning streak vs. the S&P. Those streaks would have been the longest and third-longest for any sector since 1980, but Corporate Knights misses all that action.
That goes to the heart of portfolio construction as it’s applied here. You can’t simply back-test a theory by selecting convenient dates, you have to look at a portfolio under all sorts of different market conditions.
In fact, the market and the economy are cyclical, and there’s good reason to think we’re entering a point where energy stocks will help stabilize the portfolio. (Note: I’m writing in generalities here; this is decidedly not investment advice.)
Investment professionals Alliance Bernstein notes that energy stocks can be considered a good defensive play headed into a recession, and Fidelity confirms that they tend to do very well later in an expansion. They have lower valuations and higher dividend yields than other sectors right now, which means they likely aren’t riding for a fall, and can generate cash when cash is scarce.
Nobody thinks PERA should dump its real estate holdings and go on an energy buying binge. But there’s every reason to think, contra 350 Colorado, that sometime in the next few years their money managers will be very happy indeed to have oil and gas in their portfolio.
Second, large-scale divestment essentially reinforces a political incentive to continue heavily subsidizing renewables. Make no mistake – the goal here isn’t simply to dump oil and gas, it’s to push investment in renewable energy. If public pensions on the scale or Colorado’s PERA or California’s CalPERS find themselves heavily invested in wind and solar, politicians will find themselves under pressure to put more public money behind them in the form of tax credits and renewables mandates. Thus do portfolio managers become captive to mutually-reinforcing political decisions.
Supporters will point to the Iran and anti-BDS rules, but each constitutes a handful of companies with a miniscule percentage of the portfolio. Currently, oil and gas constitute about 6% of PERA’s overall equity portfolio, and the temptation to impose additional ideological investment mandates will be irresistible to politicians.
Joshua Sharf is senior fellow in fiscal policy at the Independence Institute, a free market think tank in Denver.