Sydney Airport Bid Exposes Conundrum for Investors

Most of us running self-managed funds looked at the 20 per cent plus returns of the industry funds with admiration. Of course, it is true that the ASX accumulation index rose by 29 per cent so if all your funds were invested in those ASX stocks in 2020-21 you would have beaten the industry funds. 

Nevertheless, most self-managed funds run by the older generation have been cautious on the equity side whereas the superannuation industry funds have been strong on local and overseas equity and infrastructure and, with money pouring in each day, they have taken a long-term view. 

I know a number of self-managed fund families who have been looking at whether they should throw their lot in with the big industry funds. In the case of Australian Super you need to take all or part of your money out of your fund into your name and you invest personally in the industry fund. Hostplus allows self-managed funds to invest money direct into the Hostplus fund—a simpler system.

But in recent months there is an element of contradiction appearing in the industry funds movement. At this stage it’s merely a germinating shoot but, as we have seen so often, small shoots can very quickly get much bigger. 

We are seeing pressure being placed on Australian companies by the industry funds to lower their exposure to carbon emissions.

The funds can argue legitimately that the world is moving away from carbon emission products and therefore enterprises should do likewise as a long-term prudent strategy. 

But sometimes investment strategies based on that belief get confused because the personal beliefs of the investment managers override investment opportunities to create higher returns. 

When the infrastructure arm of the industry funds launched a bid for Sydney Airport it exposed that contradiction. 

Clearly the analysts at the superannuation funds have assumed that air traffic would return to normal and so would the profits of Sydney Airport. Accordingly, they reasoned, the shares looked cheap. Indeed, the directors made a similar calculation and deemed that the industry funds’ bid was too low. This is the normal banter that goes on in takeovers and bidders don’t normally start with their highest price. 

But there is a twist to the Sydney Airport bid. Aircraft are amongst the big users of fuel and therefore are carbon “polluters”. If we are entering a world where carbon emissions are going to be restricted in some way, then air traffic and airports are in a similar position to other major emission industries. 

So suddenly one arm of the superannuation fund is pressing a low carbon agenda on companies and another arm is putting that viewpoint aside to bid for Sydney Airport. 

And of course there is an extra hazard with Sydney Airport in that a second airport is being constructed at Badgerys Creek and this was conceived well before aircraft carbon emissions were on the agenda. Superannuation funds are assuming that not only will airlines escape the carbon pressure, but Mascot will give the new airport at Badgerys Creek a towelling. These are big calls.

On the subject of carbon there have been two court cases in recent times that caught my attention. One was the ruling in a Dutch court regarding the giant petrochemical company, Shell, which is based in Holland. It has been told that it has a duty of care for children when considering its carbon emissions not only by Shell itself but by its customers — including airlines. The court is instructing Shell to cut its own and its customer emissions by 45 per cent by 2030. Shell is appealing the decision but that will take two or three years so meanwhile there is a cloud hanging over not only large oil and gas producers but their customers.

I am not sure what the decision means longer term, but it is clearly the basis for substantial damages on the Shell Group and any other oil or gas producers. 

Here in Australia the coal group Whitehaven applied for an extension for one of its mines and was granted that extension. But the judgement handed down by a single federal court judge held that the Environment Minister Sussan Ley had a duty of care to children in approving such increased coal production. Put another way, the government via that minister has a duty of care to young children in carbon emissions. Whether that decision is going to be appealed I am not sure but either way it will be a major case. 

What we are seeing in these two cases is that the environmental movement has infiltrated the legal system and that is going to make it harder for new coal, oil or gas projects to get off the ground and may curb major users. In the last decade a lot of new power stations and other plant installations have been erected based on coal, gas and oil. Although usage may fall over time, there is still substantial demand in coming years.

We could see much higher prices for oil, gas and coal if new projects are basically blocked. Already we have seen a rise in both steaming and metallurgical coal due to similar forces. 

BHP is going through a decision-making dilemma as on the one hand it seeks to please institutions and become more green and, on the other, looks at its oil fields in the Gulf of Mexico and other nearby areas and can see great potential. 

The oil fields are capital intensive but low cost and if there is a strong oil market BHP is going to make a lot of money.

But it will not please many institutions. This is a dilemma that is going to be replayed many times in coming years and represents an opportunity for those operating self-managed funds seeking investment returns rather than environmental objectives. Meanwhile BHP is using its abundant cash to beat Andrew Forrest and buy high grade Canadian nickel producer Noront Resources.

The damage in NSW from the Delta variant of COVID-19 is developing some momentum. Banks are saying three out of four of their problem loans are coming out of NSW and credit card retail sales in NSW have slumped in contrast to other states. There is federal money flowing to help businesses but unlike last year there is community fatigue. This is made worse by the fact that whereas last year Victoria made fundamental mistakes this time Victoria has a clear set of objectives and implements them and it is New South Wales going from one mistake to the next. The spread of the virus looks very dangerous as a result. 

However, investors should take note that large corporations are able to diversify markets and sales channels in these difficult times. The groups that are hit are smaller enterprises but of course they are the biggest employers of labour so if the NSW problem extends well into the current half year there will be repercussions of some magnitude. 

But remember the world is learning to live with COVID via vaccination passports and in some areas quick testing — we will follow or at least that is what the stock market is predicting.