Finance 410 final case

Topics: Investment, Fossil fuel, Modern portfolio theory Pages: 8 (2987 words) Published: September 28, 2014
Introduction
In this case we find that several students at various universities around the United States are calling on endowment funds to divest from oil, coal and mining companies with the hope of slowing down the development of natural resources, which in turn is hypothesized to lead to climate change. Although many professors at Harvard University are pro-divesting in those types of companies, the president stated that she did not believe divesting would be “wise or effective” for the university’s take on climate change. After doing portfolio analysis, if KU were to divest, we found that it would create a stigma against the fossil fuel industry and would show that KU values a more “green” planet. On the other hand, if KU was against the divestiture, we find that fossil fuels provide much greater returns, a larger pool for security diversification of the portfolio and finally the transaction costs associated with divestiture are significant enough to dissuade us from realistically considering divestiture. Overall, there are clearly pros and cons for either divesting or not as it is shown from our data, which helped us to analyze and compare whether or not it is effective for portfolio diversification and the surrounding companies. Expected Impact of Divestiture on Oil and Gas Companies

Because of climate change and atrocious natural disasters, people are more and more concerned about environmental protection. Environmentally friendly has become a fad and trend of economic development. The idea of divesting from oil and gas stocks becomes a very emotional discussion topic; however, we ask does this emotion warrant making expensive and significant alterations to the composition of the Endowment portfolio, the Endowment fund is a large financial resource for the University; furthermore, should it be used as a political or social tool of influence? In the past two years, approximately two hundred universities’ student bodies in the United States joined the “Fossil-Free” campaign. In addition, political figures from U.S. senators to local-government officials have joined the fight. The mayor of Seattle most recently announced that the City would “refrain from future investments in fossil fuel companies and begin the process of divesting our [the city of Seattle’s] pension portfolio from those companies [Oil and Gas industries]”1.

Many movements start with universities at the very beginning and succeed in the end, like divesting from the Tobacco industry and immoral regimes [for instance the African Apartheid divestment campaign]. These learning institutions hold an enormous amount of financial capital; and therefore, significant financial influence. With over 70 colleges and universities across the nation having $1 billion or more in each of their endowment funds, they have a large impact on U.S. and foreign equities. This power to divest means that universities could sway investors, who care about the environmental issue, to alter their investment strategies and withdraw positions from fossil-fuel companies. Nevertheless, if campuses divest from oil and gas stocks, it could possibly result in some negative effects for those companies at some point in the future. Our future outlook shows that the numbers of annualized return for one year, three year, and five year of oil and gas stocks is decreasing from 13.83% to 4.85%.2 It is possible that these numbers may reflect an expectation of withdraw from the Oil & Gas Industry. Therefore, it becomes plausable that the oil and gas companies’ returns could decrease, resulting in fewer investors and a devaluation of the industry.

However, these negative expected returns for oil and gas companies have not been a factor currently. Compared with clean energy, the year-to-date current return for oil and gas is about 11.51%, which is 8.27% higher than clean energy.3 The high return can be one of the reasons for investors who care return more than the environment to keep...
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