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Fund review: Energy

Introduction

A cursory glance at some of the major indices starkly highlights this point.

While the MSCI AC World and S&P 500 indices have powered ahead by 12 per cent and 19 per cent respectively over the past 12 months to July 21, the MSCI World Energy index has collapsed by more than 21 per cent over the period, according to data from FE Analytics.

Notably, the highly energy-weighted FTSE 100 index has only managed to creep ahead by 4 per cent over the same term. The troubling environment has seen the pattern of losses echoed across funds that specialise in the sector, with, for example, BlackRock GF World Energy down, nursing a 27 per cent loss and Investec Global Energy declining 35 per cent. Artemis Global Energy has fallen steeper still, with a 41 per cent drop over the past year.

The economic backdrop has not improved much either, with oil having once again slipped below the $60 a barrel mark. Shareholders in the UK’s oil majors are bracing themselves, given the main players in the sector are updating the market with their second-quarter results.

Elsewhere, the declines in basic industrial commodity prices reflect both weak demand and excess supply.

As Invesco’s chief economist, John Greenwood, explains: “On the demand side, the slowdown of economic activity in China, Brazil and India, and the stagnation in the euro area, have lowered end-demand. At the same time, developments in specific markets have added to supply.”

But markets – and especially those involved in energy and commodities – will always endure bouts of volatility. And energy is a story that is hardly receding. While the past year has been far from covered in glory, the MSCI World Energy yardstick has achieved a total return nearer to 60 per cent in the past 10 years, of which some 20 per cent was delivered in the previous half decade.

The exchange-traded fund market has also exploded in recent years, offering investors access to a plethora of vehicles that track a wide variety of energy sources and markets.

Looking ahead, the International Energy Agency has predicted that between 2005 and 2030, world energy consumption will rise by no less than 53 per cent. This requirement is highly unlikely to be met by all traditional energy sources.

As Edward Guinness, manager of the Guinness Alternative Energy fund, asserts: “This considerable growth in demand, combined with the fact that easily extractable, cheap fossil fuels are running out, leads us to the conclusion that alternative energy will have to meet some of the world’s increasing demand for energy.”

Fund management group Miton notes too that, in spite of the lower oil price, renewable energies are becoming increasingly cost-competitive with fossil fuels. It pointed out this suggests renewable energies are ever closer to reaching that tipping point, where a significant number of small changes may ultimately lead to irreversible momentum.

THE PICKS

Artemis Global Energy

This £53.1m fund is co-managed by John Dodd and Richard Hulf who aim for long-term capital growth from a portfolio of firms engaged in the oil and gas, transmission and energy generation sectors. Oil, gas and consumable fuels currently account for 95.4 per cent of the fund. Its three largest positions are ExxonMobil, BG Group and Carrizo Oil & Gas. Like most of their peers, the managers haven’t been able to deliver positive returns in the past few years, FE Analytics data shows. In the 12 months to July 22 the fund lost 41.29 per cent.

MFS Meridian Global Energy

The team behind this fund seeks “above-average growth potential with lower-than-average valuations”, selecting stocks generally within the gas, energy and equipment services sectors. Among its top-10 positions are Royal Dutch Shell and Chevron Corp. In the past year to July 22, the fund lost 19.64 per cent, slightly less than the 22 per cent loss of its benchmark, the MSCI World Energy index. However, across five years, the fund generated a positive return of 8.43 per cent.

EDITOR’S PICK

Pictet Clean Energy

Luciano Diana and Xavier Chollet have managed to deliver positive returns in this fund, against all odds. According to FE Analytics, this £388m vehicle has delivered 42.03 per cent in the three years to July 22, compared to the 10.20 per cent average return generated by the IA Specialist sector. In the past year, the fund returned a more modest 2.57 per cent, behind the 13.39 per cent gain of its benchmark the MSCI World index. The managers’ objective is to invest two-thirds of its assets in firms that are switching to lower-carbon energy sources. Some of the names in its top-10 holdings include SunEdison, Tesla Motors and Vestas Wind Systems. The energy-efficiency sector accounts for 68 per cent of the portfolio, followed by renewables at 20.4 per cent. It is a fairly concentrated portfolio of around 54 holdings.

In this special report