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Fund Review: Energy

Introduction

Oil prices have been suffering recently during the stock market jitters, so the short-term picture looks a little worrying for investors.

According to FE Analytics, the MSCI World Energy index underperformed the MSCI World, the FTSE 100 and the S&P 500 indices in the 12 months to October 16 2014. The index was down 3.9 per cent compared to the S&P 500, which was up 9.15 per cent during the same period.

Long-term investors in the energy sector will have seen it deliver far more impressive returns, as the MSCI World Energy index outperformed the same three indices in the 10 years to October 16. It delivered a return of 127.86 per cent in the past decade, against 119.07 per cent generated by the S&P 500, a return of 109.61 per cent by MSCI World and a return of 92.62 per cent delivered by the FTSE 100.

For investors who want to gain exposure to energy through a fund or investment trust, there are more than a dozen to choose from. A search of FE Analytics using the word ‘energy’ results in 13 funds and six investment trusts.

BlackRock boasts two funds specialising in energy – its Global Funds New Energy and Global Funds World Energy funds – both of which are co-managed by Robin Batchelor and Poppy Allonby.

Likewise, Schroders has two energy funds with its ISF Global Energy and ISF Global Small Cap Energy funds.

Other fund houses with products in this space include Artemis, Pictet, Jupiter and Investec.

Among the investment trusts are the Harewood Energy Base Metals Secure Growth and New City Energy investment trusts.

Jonathan Waghorn, co-manager of the Guinness Global Energy fund, acknowledges there has been some turbulence in the energy industry of late.

“This is a period of flux,” he observes. “We’ve got relatively weak oil demand growth. We think it is just a blip as opposed to anything structural.”

Mr Waghorn refers to the fact that Libya, which is an oil-producing country, is rapidly increasing production, while production in North America has been growing strongly recently.

“And we have also Saudi [Arabia], Kuwait and the UAE producing at high levels at the moment, which means that all in all we have a near-term surplus in the world oil markets,” he points out. “At the minute, crude prices are coming down because of that excess supply.”

He goes on: “We expect the Opec (Organisation of the Petroleum Exporting Countries) producers – Saudi especially, Kuwait and the UAE – will reduce production to balance the market and stabilise prices. That’s our base-case expectation.”

Overall though, Mr Waghorn is positive on the sector and its outlook in spite of some near-term uncertainty. He says: “What we can tell you is that if oil prices maintain $100 a barrel, which is what our base case is, then energy equities look as cheap now as they did at the beginning of this year and the beginning of this year was a very good run in energy equities.”

THE PICKS

New City Energy

Launched in February 2008, this investment trust is led by Will Smith and Ian Francis. It aims to provide attractive returns in the form of capital growth “with some prospect of income”. The portfolio is currently split 78.7 per cent in shale oil and gas equities and 21.3 per cent in fixed interest. The trust has modest total assets of £25.3m. Although it delivered a loss of 29.31 per cent in the five years to October 17 against a difficult backdrop, this compared to an average loss of 36.08 per cent by the AIC IT Commodities & Natural Resources sector, where it is ranked first quartile over three and five years.

MFS Meridian Global Energy

The performance of this fund has held up well, having delivered a return of 14.09 per cent over five years to October 17, lagging the 24.32 per cent generated by its benchmark, the MSCI World Energy index. The fund aims for capital appreciation through investing primarily in equity securities of energy firms of any size. It is managed by a team of analysts that uses bottom-up fundamental research to build a portfolio comprising firms it believes have above-average growth potential. Among its current top-10 holdings are Noble Energy, ExxonMobil and Chevron.

EDITOR’S PICK

Artemis Global Energy

John Dodd has managed this £73.6m fund since its launch in April 2011 and Richard Hulf joined him in June the same year. Its objective is long-term capital growth from a portfolio of companies engaged in the oil and gas sector, transmission and energy generation. Its top-three holdings are Suncor Energy, Marathon Oil Company, and Impact Oil and Gas. The fund’s performance has struggled, according to FE Analytics, recording a loss of 19.71 per cent in the three years to October 17. In the latest fund factsheet, the managers acknowledge the drop in performance, however they believe oil company shares will find support and that “green shoots are starting to appear” in the renewables sector and have adjusted the fund accordingly.

In this special report