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Politics : Rat's Nest - Chronicles of Collapse -- Ignore unavailable to you. Want to Upgrade?

To: Wharf Rat who wrote (6770)	12/18/2007 11:29:30 AM
From: Wharf Rat	Read Replies (1) \| Respond to of 24226

Peak Oil and Portfolio Prudence Written by Jim Hansen Monday, 10 December 2007 For most of us, the holidays mean it's time to shop for gifts. For investors, the end of the year also means it's time to evaluate how their investments have done and consider changes for the coming year. This includes Peak Oil aware investors who should step back and take a good look at not just investment portfolios but also lifestyles to make sure both are in line with goals and objectives. (Note: Commentaries do not necessarily represent ASPO-USA's positions; they are personal statements and observations by informed commentators.) When I spoke at the ASPO-USA conference in Houston, I made a couple of key points concerning investing within the framework of Peak Oil. The first two dealt directly with investment assets while the third was really an assessment of the energy intensity of one’s lifestyle. My presentation in Houston began with the observation that in nearly all asset allocation models, energy is lumped into the natural resource category of equities. This is where one finds all the energy funds in the Morningstar rankings. While it is hard to make clear distinctions within the large mutual fund industry, from the investor’s perspective I believe it’s important to make that distinction. Energy should be an asset class itself. According to the California Public Employees’ Retirement System Statement of Investment Policy, “…asset allocation decisions generally account for about 90% of the investment return.” Therefore the decision surrounding what percentage of invested assets should be devoted to energy becomes very important. It is more important than the individual security selection in determining investment return. So where do most investors put their time and effort? In most cases it is into the security selection which should be secondary to the allocation decision. Make the decision concerning asset allocation the first and most important decision in the review process of the investment portfolio. Allocate time and resources where it will do the most good. Determine the allocation of the portfolio among the major asset classes of equities, bonds, cash, real estate and maybe precious metals with the addition of energy as its own asset class. Every investor will need to make their own assessment of what the allocation will be, based on individual objectives, risk tolerance and perspective of Peak Oil. The key is to take advantage of the knowledge of Peak Oil to build a better portfolio for an energy constrained future. After making the asset allocation decision, move on to what is usually the more exciting step, deciding what specific investments to own. Keep in mind the objectives and the tolerance to risk set out above. And while it’s very easy to get caught up in the thrill of the hunt, don’t run off buying solar venture capital type investments if the objective is income. One additional consideration applies at this point in the process. Expand the search beyond just the car’s gas tank. For the majority of investors, when they first consider energy the leap is immediately to ExxonMobil or some other major oil company. The energy sector covers much more than just those companies. The comments made by T. Boone Pickens and Henry Groppe at the Houston conference that many of the IOC’s “are in liquidation” adds even more importance to looking beyond the traditional idea about what constitutes energy. Expand beyond that limited view of energy and take advantage of Peak Oil’s implications to look at natural gas, coal, alternative energies and all the support businesses that will be necessary going forward. For example, the U.S. derives approximately 50% of its electricity from coal, yet in most energy mutual funds it is an insignificant or non-existent holding. Does that make sense? This is one example of how being Peak Oil aware can enhance investment results. The next important step demands an appreciation of the implications of Peak Oil in a much broader sense. Don’t stop at just owning energy investments; make sure the portfolio does not include energy risk. Look at the energy exposure of every holding outside the energy asset allocation. What will happen to a company’s basic business model if it is highly leveraged to cheap energy? If the fuel input or manufacturing feedstock doubles or triples in price how will the business cope? Will its customers continue to purchase when the costs are passed on? This is a critical step in Peak Oil aware investing and must not be overlooked. One very clear example was given by Roger Bezdek in Houston during his presentation “Aviation after Peak Oil” when he commented on airport bonds risk. He pointed out that in a potentially rapidly contracting airline industry the revenue backed bonds for airports could carry significant risk. This is a very good example of how a Peak Oil aware investor’s view of the investing landscape is different from the traditional investor’s. The final investment point I made during my presentation was that for the vast majority of investors, their ability to invest in energy will be overwhelmed by the energy component of their own lifestyle. The financial impact of escalating energy costs will unfold at a rate for which the investment portfolio alone will not compensate. How leveraged to the cost of energy one’s lifestyle is will play the biggest role. Consider a 30-year mortgage on a home 40 or 50 miles from work, driven in a low mileage vehicle with a 5-yr loan on it. Working with borrowed money the leverage could be extreme. Is employment dependent on cheap energy? Getting to and from work is only part of the risk. Is the employer’s business highly dependent on cheap energy? This will be one of the hardest parts to analyze and ultimately to deal with. The Peak Oil aware investor will have to make some very tough decisions and honest appraisals of fundamental lifestyle choices. The individual can either be proactive or reactive and that choice may dictate the final investment success. Finally, based on both Roger Bezdek and Robert Hirsh’s comments on the impact of Peak Oil on constraining GDP growth, it is important to control debt. In an economy experiencing a plateau in GDP, debt could prove to be a very heavy anchor around one’s financial neck. Debt is one financial constraint that could put tight limits on the ability to flexibly respond to Peak Oil. Therefore reducing debt seems a very prudent point of action. So while searching for that parking spot at the mall, or waiting for that overnight express package, think about the investment landscape ahead with the perspective of a Peak Oil aware investor. Take a proactive stance with the allocation of the invested assets so that energy’s impact going forward is built into the structure of the holdings. Then take on the lifestyle issues, including debt, to bring them into alignment with the energy future that will unfold surrounding Peak Oil. Jim Hansen ( jim.hansen@kmsfinancial.comThis email address is being protected from spam bots, you need Javascript enabled to view it ) is a financial consultant (KMS Financial Services) based in Seattle, Washington. aspo-usa.com