Using Economic History, a Financial Analyst Shows How Divestment Isn’t a Smart Idea

In a recent Barron’s article, Lawrence Hamtil, a fourteen-year veteran of the financial services industry, examined the costs of social responsible investing (SRI). Not only does Hamtil disapprove the idea of divesting stocks from industries based on social preferences, but he points out the flawed logic of SRI because of financial history.

Today, those who are demanding divestment action be taken by universities or pension funds are basing their claims on the recent plummet of oil and gas stocks. However, as Hamtil suggests a broader view is needed than just the past few years.

Therefore, looking at the performance of fossil fuel stocks since 1926 until 2015, a board member or financial analysts will see that “the energy sector as a whole has been one of the strongest and most consistent performers of the overall US stock market.” In fact, energy stocks typically perform better than the S&P 500 and have proven to diversify a portfolio ensuring better returns on investments.

Hamtil notes that the energy sector’s performance also doesn’t correlate with the overall market and doesn’t always coincide with the strength in the U.S. dollar. This is ideal for pension funds that are cash-strapped and looking for ways to diversify. It’s especially a good idea to keep investments in energy stocks as it provides an alternative to technology and financial stocks that tend to rely more heavily on the overall market.

Overall, Hamtil believes that divestment from fossil fuels is not the right move if you are seeking a strong and reliable portfolio. Unfortunately, if boards do decide to divest pension funds from the energy sector then they may be “setting themselves up for a shock the next time the dollar cycle turns down.”

 

 

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