Is there profit in clean energy?

Can you profit from climate change or will it hurt your portfolio as well as the environment?.

What is clean energy?

Clean energy means power derived from renewable/sustainable sources such as solar, wind, water, geothermal and, to some extent, biofuels. The advantages over energy derived from finite fossil fuel sources such as oil, gas and coal is that they are far less likely to run out or pollute our environment. Nuclear energy falls somewhere between the two - while sustainable long term there are issues over used radioactive material and severe pollution in the event of accident.

Is the future green?

The simple truth is that (to some extent) it has to be. Our reliance on fossil fuels can't last forever, especially as emerging market demand for energy will soar in years to come. However, in the short term developed countries seem more concerned about repairing their fragile economies and emerging countries want to keep growing theirs - clean energy tends to take a back seat unless forced.

Despite the relative failure of the Copenhagen Climate Change talks in late 2009, there is a general move towards greater use of clean energy and a number of countries and economic regions have set their own renewable energy targets. Expect clean energy to once more feature more prominently on the global agenda within the next 5 years.

The table below gives some idea of where renewable energy usage (as a % of total) stands at present and the extent it must grow to meet targets (note: I've found it surprisingly difficult to source accurate data for current renewable energy usage, figures shown are broadly correct):

Country/Region	Present Usage	Target by 2020
UK	3%	15%
EU	11%	20%
US	9%	No target
China	8%	15%
India	4%	No target

The consensus amongst global bodies seems to be that renewable energy usage should reach 80% by 2050 - a pretty major shift from where we are now.

Does this mean good investment opportunities?

Proven clean energy sources will undoubtedly be used more widely in years to come, along with other green technologies still in development. So investments in this area should generally prosper.

However, clean energy investment performance is heavily influenced by the oil price in the shorter term - if the oil price is high then clean energy is attractive and vice versa if it's low. Until oil supply starts to dry up, or we're all compelled to use significantly more clean energy, it's hard to see this changing. Yes, over time we'll almost certainly be compelled to use more clean energy, but with a probable timescale of 10-20 years or more there’ll be little short term change.

If you’re hoping to make a quick buck from clean energy then I’m afraid you’re probably out of luck...unless the oil price rises further or you find a company on the cusp of bringing a successful new clean energy technology to market – easier said than done.

But invest sensibly in clean energy for the longer term and I think it’s very likely you’ll make worthwhile returns, just be prepared for lots of volatility along the way.

What about other green investments?

Clean energy isn’t the only area that could benefit from concerns over climate change. Businesses involved in water and waste management, green transport and sustainable living (e.g. organic agriculture, forestry & ethical science/healthcare) also stand to benefit from global environmental pressure.

But bear in mind that companies focussing on environmental issues tend to be relatively small and often based overseas. This can make them harder to research and potentially more speculative, especially if they're trying to develop new technologies. Plus your investment could be further affected by exchange rate movements. Always try to thoroughly understand a company and the possible risks before parting with your cash.

Are there any investment funds that invest in clean energy?

There are a few, examples include:

ETFX DAXglobal Alternative Energy ETF - tracks a global index of around 15 clean energy companies for 0.65% a year. It has equal weightings between five sectors: solar, wind, geothermal, natural gas and biofuels. As it's a 'synthetic' ETF there is counterparty risk, but I think this is a still a sensible way to invest in clean energy.

Blackrock New Energy Investment Trust - run by an experienced team but it's been more successful at losing money rather than making it in recent years. Its performance fee can also add to cost. Nevertheless, might be worth a punt long term.

Guinness Alternative Energy Fund - an Irish based fund that primarily invests in small solar and wind energy companies across the globe. Performance since launch in 2007 is less than convincing (it has consistently underperformed its benchmark index), although this is a short period of time to judge such a specialist fund.

Other more general environmental funds that partially invest in clean energy companies include the Jupiter Green and Impax Environmental Markets investment trusts. More diversified funds like these might be more appropriate unless you're comfortable with the additional risks of specifically investing in clean energy.

Be careful not to become too exposed to oil prices

Finally, bear in mind that your existing stock market investments will likely have a reasonable exposure to conventional 'dirty' energy companies (oil & gas companies make up about 20% of the FTSE 100). If you also invest in clean energy you might find your portfolio becomes excessively exposed to oil price movements shorter term - ensure you're comfortable with the risks of doing so!

Read this article at http://www.candidmoney.com/articles/article225.aspx

Should I sell commodities?

Question
As a novice investor I reacted to a very recent recommendation in Investor's Chronicle to invest in "7 Resources shares set to soar". Having put £500 in each (SNRP, NOP, IGAS, ZOX, GDP, KENZ, ANR) last week I am now not quite sure how to react to this week's decline in commodity equities.

My gut feeling is that I am in for the long term and things should recover, even if there is a big correction in commodities looming. OR at just 5% loss so far do I get out now?

Answer
Commodities investing is pretty high risk in the scheme of things so last week's setback, while painful, is not out of the norm.

Provided you're comfortable investing for 5-10 years or more I'd be inclined to stay put (in general, I haven't researched the companies you've bought shares in), as I think the long term outlook for both hard and soft commodities is good, largely thanks to growing emerging markets demand. Take a look at my articles here, here and here.

Shorter term price movements are very difficult to predict. There's little doubt that an influx of investors have driven up prices of hard commodities over the last year or two, so if some of those investors subsequently decide to sell and reinvest elsewhere (as happened last week) prices will fall. But then there's a fair chance other investors will dive in, pushing prices back up again. Plus, of course, there's the potential impact of unpredictable global events and politics.

Just bear in mind that by investing in individual companies you run operational risk (e.g. if something goes wrong with their mines or production - e.g. BP), although shares in commodity companies tend to rise by more than underlying commodity prices during the good times.

Read this Q and A at http://www.candidmoney.com/questions/question467.aspx

Should I join Lloyds Action Now?

Question
I have shares in Lloyds TSB and recently recieved a letter from Lloyds Action Now saying that they were taking action against Lloyds on behalf of shareholders but would require nearly £300 from me to fund the action and I would be excluded from any compensation if i did not join (most of my shares were puchased after the HBOS merger).

I'm not to sure what this is about or whether it's to my advantage, what's your advice?

I also own shares in Minmet which disapeared 3 or 4 years ago and suddenly I've recived an annual report for 2009 and a voting from, but i can't find anything out about what's happened to this company or if in the future the shares will have some value. Do you know anything?Answer
Lloyds Action Now is a group of Lloyds TSB shareholders (currently around 4,000) who are fighting for compensation with respect to losses they incurred following the Government's merger of Lloyds TSB and Halifax Bank of Scotland (HBOS). Their main bone of contention is that the Government didn't disclose the extent it had propped up the ailing HBOS, whose precarious financial position appeared to have a big downward affect on the Lloyds TSB share price following the merger.

The Group is a not for profit organisation trying to build up a fighting fund to take the Government to court. The contribution required to join is £300, or £270 if you apply online (plus 3.6p per share if you own over 750 shares), although if you own fewer than 250 shares you only need pay £60 now - the balance will be paid from any compensation payout. It's hoped the money raised will be sufficient to cover legal costs (and the costs of trying to increase membership shorter term), but if more money is required to fight the case the Group plans to seek this from a litigation funder (someone who backs the case in return for a cut of any winnings) rather than members.

Should you join? In the first instance I'd check whether you might theoretically be entitled to compensation, given most of your shares were purchased post merger. Take a look at the Lloyds Action Now website which has a simple tool to help establish this.

If you are eligible then it's really a case of whether you want to gamble £300 for the opportunity to potentially win compensation in future. Such court actions can be lengthy affairs, so it might take years before a verdict is given. And trying to successfully predict the outcome now is nigh on impossible. If there's potentially thousands of pounds at stake it might be worth taking a punt, but bear in mind you could be in for a long, uncertain wait.

Minmet was an oil and gas exploration company, delisted from AiM in 2008 following controversy over the way the company had handled its cash and failing to disclose information to its shareholders (more info here). It's now trading as Aventine Resources PLC and the 2009 Annual Report you've received suggests the company is trying to sell off its largest investment, shares in Tucumcari Exploration LLC (a part-developed Mexican gas and pipeline infrastructure). I know very little about the company, but from skimming through the report I think there's a slim chance your shares will have some value in future. But given you have little practical option but to stay put let's keep our fingers crossed!

Read this Q and A at http://www.candidmoney.com/questions/question466.aspx

The ETF risks you ought to know

Exchange traded funds (ETFs) have soared in popularity, but should you be concerned about their 'hidden' potential risks?.

ETFs are big business and, in general, a great idea. They provide a low cost way to track a dizzying number of indices across assets including stock markets, fixed interest, commodities and property. And because they're traded on stock markets buying and selling is both fast and simple.

However, there are a couple of risks (aside from the tracked index falling) that you should be aware of. Graeme mentioned these is his recent article, so I thought I'd further explain so you can gauge the risks for yourself.

Apologies if you find this a bit long-winded and technical, but that's unfortunately just the way it is. I'll try and explain things as clearly as I can!

Synthetic ETF risk

There are basically two ways an ETF can track an index. It can either buy the physical underlying stocks (often called 'securities') or buy a piece of paper from another financial company that promises to pay the index returns (called a 'swap').

When an ETF buys underlying securities it should be pretty safe. For example, a FTSE 100 tracker would buy shares in all the FTSE 100 companies and then give them to a third party custodian (usually a large bank) to look after. If the ETF provider goes bust your fund should be unaffected as the shares are still safely held by the custodian.

ETFs that use swaps are tracking the index synthetically, as they're using promises on bits of paper rather than physical securities to provide index returns. Nothing wrong with this per se, but you're now relying on another financial company honouring their promise in order to receive the index returns - this is called counterparty risk.

Synthetic ETFs must, under EU law, limit this risk to 10% of the fund per counterparty. They might do this by using lots of different counterparties and/or ask counterparties to stump up some security (called 'collateral') to protect against them breaking their promise. For example, an ETF using one counterparty would need to get collateral of at least 90% of the fund's value to ensure it meets the 10% counterparty risk rule.

Collateral is a good idea, but there's a risk that if it needs to be used it won't be worth as much as expected. That's because the collateral doesn't have to be the same securities as the index being tracked. So a synthetic FTSE 100 ETF could theoretically hold shares in small companies or junk bonds as collateral - stuff that might prove hard to shift in a hurry at the price assumed by the ETF in its collateral calculations.

Stock lending risk

ETFs that buy physical securities can still suffer counterparty risk if they decide to lend some of their securities to someone else. Why would they do this? Simple...to earn more cash.

Lots of financial institutions like to borrow stocks as it can help them profit if prices fall. For example, a bank might borrow stock from an ETF, sell it straight away on the market, then later buy back the same stock (hopefully at a lower price to make a profit) when it's due to return the stock to the ETF. In return for borrowing the stock, the bank will pay the ETF a fee.

ETF managers generally split this fee about 50/50 with the fund itself (i.e. investors) - iShares splits it 60/40 in favour of investors.

This doesn't sound a bad idea, but what happens if the counterparty doesn't return the borrowed stock? Well, as per above the ETF would normally hold collateral to limit counterparty risk within the rules, but in a worst case scenario you could lose up to 10% per counterparty - possibly more if the collateral ends up being worth less than the ETF expected.

The extent ETFs lend securities varies between funds, it could typically range from zero to more than a quarter of the fund. The revenues from securities lending will obviously vary accordingly, but when used heavily could add a percent or more to annual fund performance.

Securities lending is not a bad thing, lots of funds (not just ETFs) do it. The key is to understand the extent and to whom a fund lends stock, how much money it receives in return, the split of lending revenue between the fund/manager and the amount/quality of collateral is held.

Once again, not all this information is readily available, if at all. iShares, which offers more physical securities (rather than synthetic) ETFs than most, publishes securities lending revenues in the annual report & accounts for its funds and lists some (outdated) figures on the extent of lending and collateral held in a brochure targeted at large intuitional investors.

This is better than most, but still falls short and is nigh on impossible to find for a typical private investor.

Wot no compensation scheme?

A big incentive for trying to gauge the counterparty risks mentioned above is that ETFs are not covered by the Financial Services Compensation Scheme (FSCS) and rarely covered by equivalent overseas schemes. So if a counterparty failure ends up losing you money I'm afraid you'll have to take the hit.

Conclusion

Now before you get too scared, let's put all this into context. Counterparties tend to be large banks that very seldom go bust. Yes, Lehman Brothers was a very big counterparty and did go bust, but while we can never say never the likelihood of something similar happening is low.

And even if a counterparty does go bust then no more than 10% of an ETF should be exposed, although it could be more if the collateral held turns out to be toxic hence difficult to sell.

The issue for investors is being able to sensibly gauge these risks. ETF providers tend to tuck away basic collateral and securities lending information, assuming they even publish it, and counterparty information is often scant - in my view a major failing that the regulators should address.

These potential risks don't make ETFs bad, I will continue to use to both physical and synthetic ETFs for exposure to indices that are otherwise difficult to track. But they do mean it's sensible to browse an ETF's prospectus before investing to get a clearer idea of whether it tracks the index physically or synthetically, the counterparties, whether it lends stock and, if so, what cut the fund will receive.

We can live in hope that ETF providers are one day forced to clearly display this information on fund factsheets, including a summary of any collateral held.

Oh...and tax

If you're still awake then a final thing to think about is tax. ETFs are based offshore which means that gains could be taxed as income if the fund hasn't attained either reporting or distributor status. Take a look at my answer to this question for full details.

Read this article at http://www.candidmoney.com/articles/article223.aspx

Declare inheritance on tax return?

Question
Does my wife need to declare an inheritance in her tax return?Answer
No. She will have received the inheritance after any inheritance tax owed by the deceased's estate had been paid - so there's no tax payable in her hands.

Just bear in mind that if she's earning an income or return on the money (since receiving it), for example maybe it's getting interest in a savings account or she's invested it, then the money earned might have to be included in her tax return.

If she doesn't normally complete a tax return then the simplest way to find out if she'll need to is to look at the HMRC website here, which gives a list of criteria for when a tax return is required.

Read this Q and A at http://www.candidmoney.com/questions/question465.aspx

How to hold investment trusts tax-free?

Question
There are several ITs from various providers that provide a good yield. Is there an easy way to hold these so that the income is Tax free. (My SIPP makes an annual charge for holding ITs, and my ISAs have been carefully consolidated under Cofunds - who also don't deal with ITs )

Answer
Yes, but it will mean using your ISA or pension allowance via a stockbroker/platform that allows shares to be held.

I'm afraid this will entail a bit more paperwork, annoying after you've so carefully moved your ISAs onto Cofunds and used a SIPP elsewhere, but it's pretty straightforward.

If you plan to use your ISA allowance for the current 2011/12 tax year then you can simply invest the money via the new chosen ISA provider. Otherwise, you could use some of your existing ISA money by transferring some Cofunds holdings across to the new provider. The money will be transferred as cash, so you can simply invest this once it arrives at the new ISA provider (the process usually takes a few weeks).

As for which ISA provider to chose, look for one that offers low cost share dealing and doesn't charge for the ISA wrapper. The cheapest I've found to date is x-o.co.uk (review here), although Interactive Investor, TD Warehouse and Alliance Trust Savings are also competitive.

If you'd prefer to use a pension for holding investment trusts consider a low cost SIPP provider who doesn't charge to hold shares - see my review of Sippdeal here for a good example.

Note: it's impossible to enjoy truly tax-free dividend income (as the corporation tax paid by companies on profits before dividend income is paid out cannot be reclaimed), but at least within an ISA there's no further tax on dividend income if you're a higher or top rate taxpayer. The same is true within a pension, although when you eventually draw an income it's taxable.

Just a word of warning re: high yielding investment trusts - make sure you fully understand the risks involved. The high yield might be due to the trust borrowing extra money to invest (known as 'gearing') - great when markets rise, but it will exacerbate losses when they fall. Or you might be looking at split-capital income shares, where the return of capital depends on performance between now and the investment trust's wind up date. In the right markets both could prove good investments, but they're arguably more risky than a plain vanilla equity income fund.

Read this Q and A at http://www.candidmoney.com/questions/question464.aspx

How to put money into a pension for children?

Question
I would like to make a gift to my children (early 30s) to be invested in pensions. How do I go about this? Do I or my children get tax relief on the pension contributions?
Answer
It's a simple process where you effectively gift the money to your children and they pay it into a pension, hence they (not you) enjoy the tax relief on contributions.

To make life simpler pension providers will usually let you contribute the money directly on behalf of someone else (e.g. spouse or children), but from a tax point of view it will be treated as if they made the contribution (as per above).

Basic rate tax relief will automatically be given on the contribution, so for every £80 you contribute it'll be grossed up to £100. If the person you're contributing for is a non-taxpayer then the maximum allowed total annual contribution (that enjoys tax relief) is £2,880, which will be grossed up to £3,600 (assuming they haven't already used this allowance). Otherwise, the only consideration is whether your contribution, coupled with any they make (including their employer), pushes their total annual pension contributions above their annual income (capped at £50,000), as those in excess of this are taxed to remove the benefit of any tax relief.

If the child is a higher or top rate taxpayer then they can reclaim the additional tax via their tax return, so a £100 gross contribution would effectively end up costing £60 or £50 respectively.

Any contributions you make on behalf of your children could be viewed as a gift for inheritance tax purposes, a potentially useful way to get money your of your estate provided you live for at least 7 years after making the gift.

As for which type of pension to use, I'd consider a stakeholder or self-invested personal pension (SIPP). The former is simple and generally cheap, the latter gives more investment choice and chosen carefully can also be cost effective. Take a look at our Guide to Choosing a Personal Pension for more guidance.

Alternatively, if your children are members of an occupational pension scheme it would be worth investigating whether paying additional contributions into that scheme would be more cost effective and/or beneficial.

Read this Q and A at http://www.candidmoney.com/questions/question463.aspx