Grantham, Part 5

This video is part five of five from GMO’s Jeremy Grantham’s address at the 2018 Morningstar Investment Conference. You can also watch parts one, two, three, and four.

Jeremy Grantham: This is what a portfolio, it's our portfolio of climate change which has been around for a year. What we're trying to do is just understand these amazing cross forces at work and make money. I think it would have a bigger statement to clobber the benchmark than anything else. It has lots of clean energy, smart grid, copper. Copper is 5 times more used by electric cars and electricity in general. Masses of energy efficiency opportunities, and agriculture over 23%. I can say one thing, I can guarantee that they will have a higher top-line revenue than the balance of the market.

Finally, the peril of divestment. This should be pretty clear from this that if you're messing around with oil stocks, you're taking some diabolical liberties with stranded assets, and if you're messing with chemical companies of the right kind or the wrong kind, you're taking some risks. Oil companies are being sued everywhere because we caught them with their hand in the basket. They were writing peer-reviewed stuff in the late '70s proving that carbon dioxide was dangerous that the ocean levels would rise.

They took advantage of their knowledge, they took it into account to drill in the north, in the Arctic and to site their refineries. And they have misrepresented their product. You go into a committee, investment committee, the most conservative groups on the planet as we all know. I have spoken to many more than a thousand of these guys, perhaps 3,000 or 4,000. And you know what they're like, if you cast, you will ruin their performance. If you try and avoid anything, any constraint, it will ruin their performance. I'm sympathetic, you don't want everyone with a bee in his bonnet to come marching in. This is the mother and father of all exceptions, this is about our survival. This is what I did. We took out each of the 10 major groups in the market for 30 years and what we found was it didn't make any difference. That's the return you get without energy, you make three bits more without energy. And look at them, we graph them together and other than the 2000 bubble, they're all the same. It's an amazing line, isn't it? That one.

And then I had a fit of conscience, it took us a lot of effort and we went back first in 1957 and then all the way back to 1925. And look at 1925, the range has soared from 50 bits to 54 plus or minus 27 basis points between the best group missing whatever and the worst. When you divest of oil or chemicals, the starting assumption is it will cost you a few bits or make you a few bits just as likely to be positive as negative. And these are the facts not the hearsay of the investment committee. I think oil and chemicals are just the exception to make the rule here because what these guys did not have is what we have. We have a 30-year well-funded program to disguise the issue. We have a Republican Party where 60% of the people don't believe a word of the facts that I have showed you. Some of them presumably are in the stock market. How many of these deniers like Paul Singer, who is my biggest hedge fund, he doesn't believe in climate change.

How many of these people in the market does it take to distort the prices? The boss of the Bank of England, the governor, Mark whatever, has been telling everyone you are bitterly underestimating the penalties of oil. I agree.

Let me finish, if I can find it. Oh, dear, I scrambled it in the middle of all these things. Recommendations, what I'm hoping you will do is first of all vote for green politicians. I don't care what party they belong to. And by the way, all the great environmental law of the past 100 years came from Republicans. Second, lobby or investment firms to be a bit greener and encourage them to lean on their portfolio companies to do the same. Push them hard your bosses. Cash in some of your career risk units. You will at least be able to look your children in the eye, you may even feel better. And your firms may seriously be able to attract more of the best kind of young recruits who begin to care very much more about these issues than we all collectively do.

We’re racing to protect much more than our portfolios from stranded assets, another climate change impact. That I believe is easy enough. But for those portfolio managers who happen to be human, we have a much more important job. We’re racing to protect not just our grandchildren but our species, so get to it. Thank you. We got 2 minutes and 40 seconds for questions.