Beating The TSX

                                       Global Warming And
                                       Your P...
world’s energy infrastructure away
late in 2007 at a price of
                                  TABLE 1 - SOME POSSIBLE CONSTITUENTS OF A LARGE-CAP GLOBAL WA...
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Canada Money Saver Jun 08 - Weather Investments - UBS Global Warming Index - Murisic


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UBS Global Warming Index (Ilija Murisic)

Keywords: Weather, HDD, CDD, CME, futures, climate change, Index ,Kyoto, UBS, derivatives, hybrids, trading, structured products

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Canada Money Saver Jun 08 - Weather Investments - UBS Global Warming Index - Murisic

  1. 1. Beating The TSX Global Warming And Your Portfolio David Stanley S cience and politics are often at odds. The best Unfortunately, these only exist since 1976, but mean, maxi- current example is the global warming debate. Un- mum, and minimum temperatures were available, if only deniably, our planet is getting warmer and this is in °F. I picked two days, April 9 (spring) and October 9 likely to continue. An overwhelming majority of (fall), and eight dates over the period from 1976-2008. I the world’s scientists agree that human activity is responsi- averaged the two days and looked at the mean temperature ble, but politicians in many countries continue to dither and the difference between the minimum and maximum about how to contain this huge problem. The object of this temperatures (Figure 1). The slopes of both lines are up- column is not to enter the debate but to examine invest- ward, indicating an increase in these data, but, of course, ment opportunities emerging from the global warming there are too few data to draw a statistically meaningful event. conclusion. Readers may wish to gather data for their loca- To review, global warming is the current and ongoing tions and draw their own conclusions. increase in the earth’s surface (air and water) temperature. However, if we consult Environment Canada (http:// Its cause is almost undoubtedly the proliferation of green-, we house gases (carbon dioxide, methane, and other gases) due see that winter temperatures have generally been increasing to, among others, industrial pollution. These gases form a nationally with a warming trend of 2.3°C over the last 61 layer around the earth that traps some of the heat from the years (Figure 2 shown on the next page). sun, thus warming the planet and also causing more ex- World data also show a distinct warming trend. Figure treme weather variations. While scientists embrace this view, 3 (shown on the next page) gives results for three climate politicians have been slow to agree and even slower to take parameters. From these and other data, the IPCC predicts steps necessary to abate greenhouse gas emissions. temperature rises of 1.1-6.4°C by 2100. Just as an exercise for myself, I downloaded (http:// The warming of our planet will have significant effects on the human population as well as all living species and some historical weather information for the site closest to the natural environment in which we exist. Economists me (Waterloo-Wellington Airport) that had weather records. predict reduced GDP levels, and, in particular, agriculture will face many difficulties. Some of these are grain short- ages, increased food prices, more soil erosion, and loss of soil fertility. The effects of global warming will not be felt equally around the globe and Southern Africa is thought to be the most at risk. In the last several years 15 food riots have occurred, 10 of them in Africa. We need to remember that modern agricultural practices, including fossil fuel us- age, massive deforestation and burning, and increased live- stock production also contributes significantly to greenhouse gas emissions. Global warming is not only an environmental issue, but also a financial and economic one. Scientists and engineers, leaving politicians to argue over such subjects as the Kyoto Protocol and trading of carbon emissions, Figure 1 - Weather data for the Waterloo-Wellington Airport, ON, from are engaged in worldwide research aimed at reducing the 1976-2008. impact of greenhouse gases, whether by developing Canadian MoneySaver • PO Box 370, Bath, ON K0H 1G0 • (613) 352-7448 • • JUNE 2008
  2. 2. world’s energy infrastructure away from fossil fuels will be a human activity for many years and there is a universal call for more research and development. Undoubtedly, numerous investment opportunities will arise from this work. Let’s look at some ways the individual investor can participate. First, let me say that the mention of any particular investment does not constitute an endorsement on my part. As always, you need to do your own due diligence. Several asset classes are open to investors: • Futures trading - While this is not appropriate for either the Figure 2 - Canadian winter national temperatures from 1948-2008. Source: Environment Canada. amateurs or the faint of heart, I was surprised at the number of possi- alternate energy sources or reducing pollution. Reconstructing the bilities. The weather derivatives market, traded on the Chicago Mercantile Exchange (CME), is larger than I thought. Last year a new index appeared, the UBS Global Warming Index (UBS-GWI), composed cur- rently of weather futures contracts of 15 U.S. cities, although cities from Europe and Asia are expected to join the index. The price of this index depends on the difference between the average daily temperatures and the given base temperatures. There are also specific Canadian futures, one being the Canadian Monthly Weather Heating Degree Day (HDD) index that is geared to how much below 18°C the tempera- ture averages in a given city in Canada in a given month. • Exchange-Traded Funds - ETFs have the advan- tages of providing the investor with a portfolio of stocks in a sector for a reasonable management fee. The three available sectors that match up most closely with global warming are agriculture, solar energy, and water. Here is an example of each one. The Claymore Global Agriculture ETF at- tempts to match an agricultural index containing companies specializing in fertilizers and agricul- tural chemicals (57%), farm machinery (22%), packaged food and meats (12%), and agricultural products (9%). The top 4 holdings in the ETF are Deere, Monsanto, Potash, and Syngenta, totalling Figure 3 - Changes in (a) global average surface temperature; (b) global average sea level rise from tide gauge (blue) and satellite (red) data and (c) northern 36%. The U.S. and Canada are the two top coun- hemisphere snow cover for March-April. All changes are relative to corresponding try weightings. This fund (COW on the TSX) has averages for the period from 1961-1990. Source: 2007 Intergovernmental Panel on a management fee of 0.65%. COW began trading Climate Change (IPCC) Fourth Assessment Report Canadian MoneySaver • PO Box 370, Bath, ON K0H 1G0 • (613) 352-7448 • • JUNE 2008
  3. 3. late in 2007 at a price of TABLE 1 - SOME POSSIBLE CONSTITUENTS OF A LARGE-CAP GLOBAL WARMING PORTFOLIO. $20.00 (CAD) and as of April 18, 2008 had ad- Company Ticker Business Price ($) Yield (%) P/E vanced to $25.75 (CAD) General Electric GE (US) Electrical engineering, water purification 66.44 2.60 20.5 with a dividend yield of Johnson Controls JCI (US) Automotive control, energy management 35.05 1.50 15.5 0.84%. Waste Management WMI (US) Waste management, recycling 35.76 3.10 16.9 Another ETF operating Alcoa AA (US) Aluminum, automobile parts 36.26 1.90 13.9 in the global warming area Caterpillar CAT (US) Earth moving equipment 85.28 1.70 16.0 is the Claymore Global So- DuPont DD (US) Chemical, agriculture, biotechnology 52.02 3.20 15.9 lar Energy Fund (TAN on FPL Group FPL (US) Electric utility, fiber optic network 66.44 2.60 20.5 the NYSE Arca Options) Archer Daniels ADM (US) Agricultural processing, ethanol 46.47 1.10 18.3 that attempts to match the John Deere DE (US) Agricultural equipment 92.68 1.10 20.8 results of a global solar en- Siemens A G SI (ADR) Industrial automation, building tech 113.95 2.10 11.0 ergy index. The top three Magna Intl. MG.A (CAN) Automotive systems 72.01 2.00 12.0 ITC Holdings Corp. ITC (US) Electricity transmission infrastructure 56.38 2.10 32.9 country weightings are Dow Chemical DOW (US) Chemical, plastic, agricultural products 39.98 4.30 10.5 China, Germany, and the Honeywell Intl. HON (US) Diversified tech. and manufacturing 60.99 1.90 18.2 U.S. This ETF just began Trinity Industries TRN (US) Rail services, highway construction 27.10 1.10 7.0 trading on April 15, 2008 Source: Alt Energy Stocks ( and as of April 18, 2008 was priced at $26.60 (U. S.) with a management fee of 0.65%. Most observers are of a definite U.S. slant. Some Canadian stocks that might be the opinion that while the solar industry does have a viable considered for a large-cap portfolio of sustainable environ- business model, many of the small companies in this space mental development include Suncor (SU), TransCanada have gotten ahead of themselves considering that they have Corp (TRP) and Petrobank (PBG), among others. yet to turn a profit. Solar energy is very early in its growth phase and shareholders should exhibit patience, realizing • SRI (Socially Responsible Investing) - Last, but certainly that this is a long-term investment. not least, is the concept of investing in SRI funds that are Finally, a third Claymore offering focuses on water-re- dedicated to filtering out heavy polluters or those compa- lated businesses. The Claymore S&P Global Water ETF nies with a sub-par environmental record. Some Canadian (CWW on the TSX) is composed mainly of water utilities funds that use this approach include Acuity Funds, Ethical and water equipment companies. It has a management fee Funds, and Meritas. Further information can be found at of 0.60% and pays a yield of 1.52%. This ETF has been SRI trading since early in 2007 and has declined from about funds not only do not invest in bad corporate citizens, but $20.00 (CAD) to a current price of $18.33 (CAD) as of also use their leverage to encourage companies to under- April 18, 2008. The top three country weightings are the take environmental reform. U.S., France, and the U.K. These are just three examples of sector ETFs that are As always, I hope this column will generate discussion related to global warming. Other funds are available and and I will attempt to answer your questions. may be more or less suited to individual investor’s needs. David Stanley, PhD, Rockwood, ON, • Individual stocks - If, upon inspection, the above ETFs seem a little too risky and volatile for your taste, you may wish to consider formulating a portfolio of engineering, industrial and utilities companies composed of large-cap, blue-chip, dividend-paying stocks characterized by inter- national exposure and a likelihood of participating in the effort to curb global warming. Conveniently, the folks over at Alt Energy Stocks ( chives/2007/11/our_blue_chip_alternative_energy_stock _list.html) have composed such a portfolio, some of which is shown in Table 1. While not all of these companies may appear on lists of “most eco-friendly”, they do stand to profit while working to help the environment. This portfolio has Canadian MoneySaver • PO Box 370, Bath, ON K0H 1G0 • (613) 352-7448 • • JUNE 2008