This $330m (£205m) fund offering from Guinness Asset Management is co-managed by Tim Guinness, Will Riley and Jonathan Waghorn.
Mr Guinness and Mr Riley have been at the helm since its inception in March 2008 and were joined by Mr Waghorn just over a year ago. The aim is to provide investors with long-term capital appreciation by investing in companies involved in the exploration, production or distribution of oil, gas and other energy sources.
According to Mr Waghorn, the managers start with a quantitative process to select stocks. He says: “The investment process is driven partly by top-down analysis and macroeconomic issues, and partly bottom-up stockpicking, where we do very detailed, fundamental, rigorous analysis of energy stocks. That starts by running a screen across roughly 400 energy companies, then gradually narrowing down by doing more due diligence and eventually, very detailed company financial modelling to work out what stocks go into the portfolio.”
He emphasises that it’s an equally weighted portfolio, global in nature, with a focus on a single sector. “It’s high-conviction as a result of equal weighting, so it’s very concentrated around those 30 positions,” he says. “We have an index that we need to beat on a performance basis but we don’t run the fund to the index. So it is very much unconstrained in terms of the portfolio construction and the names that go in.”
The benchmark Mr Waghorn is referring to is the MSCI World Energy index. He reiterates that the fund is “a pretty straightforward equity product”.
He also acknowledges the importance of macro factors. “It’s an energy fund,” he says, “so oil prices, gas prices, coal prices, they’re all important factors when we consider the stocks that go into the portfolio and how we have the different allocations to the different sectors within the energy space. We spend half of our time doing macro analysis and that’s a lot of what we’re doing at the minute if you consider oil prices coming off as they have done, considering oil supply and demand and the cost of supply.”
Investors may want to note that the fund is placed towards the higher end on a risk-reward profile, at level six out of a possible seven, and has ongoing charges of 1.99 per cent.
Mr Waghorn notes that it is not a trader’s portfolio as the managers have a buy-and-hold approach, resulting in low turnover. This year, he says, the fund has sold out of a number of US exploration and production companies. The most recent change was a decision to sell Chevron and buy into Occidental Petroleum. “Some of that money has been recycled into North America [equities] and some of it has come across into European energy equities,” he adds.
Mr Waghorn notes: “If energy is going to do well, history has shown that this fund will substantially outperform the benchmark and peers. During pullbacks, which is exactly what we’re going through now, we generally end up underperforming the index. But over time, what we’ve made in the up cycle has more than compensated for what we’ve lost in the down cycle.”
Data from FE Analytics shows that in the 12 months to October 16 2014, the fund made a loss of 10.69 per cent, against a loss of 3.94 per cent by the MSCI World Energy index. Performance over five years has been slightly better, with the fund returning 8.24 per cent and the index 24.92 per cent. As the manager says: “We don’t claim to be market timers, so we can’t pick the tops and the bottoms of the crude price and the energy market.”
Citing service company Halliburton and refining company Valero as holdings that have added to the portfolio’s performance in the past 12 months, he says: “Predominantly it’s been North American exploration and production companies that have been our strongest areas. I’d also include North American service companies as well.” As for areas that have been bad for the fund: “Gazprom was not good for us this year and PetroChina was not good last year.”
Discussing the portfolio’s current underperformance, he says: “In the most recent pullback that we’re going through now, we don’t hold enough of the super majors, like Chevron, Exxon. That explains some of the most recent performance.”
EXPERT VIEW
Jon Beckett, UK research lead, Association of Professional Fund Investors
The fund tends to invest in a concentrated portfolio of roughly 30 equally weighted stock ideas of approximately 3 per cent each. Two-thirds of the fund is held in North America and UK listings. The team then compares sectors to decide on allocation approach and then drills down through stock-specific analysis. This strategy is all about finding good-value companies, with improving sentiment and early signs of positive trading.
