InvestmentsAug 10 2015

Fund Review: Investec Global Energy

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Charles Whall and Tom Nelson are co-portfolio managers on this £86.1m fund, which they say is designed to give investors exposure to companies involved in global energy, specifically the exploration, development and production of hydrocarbon and renewable fuels.

Mr Whall notes: “This is a truly global fund, with performance measured against the MSCI All Country World Energy index, which includes the emerging market oil companies.”

The manager explains the process is built on what he refers to as the “twin pillars” of commodity and individual company equity analyses, with portfolio construction subject to a five-stage process. “Key commodity markets are modelled discretely, building from an individual country/project level,” he says. “Individual company financial models are prepared using a proprietary methodology for understanding each firm’s relative leverage-to-commodity price moves. Price targets are derived on a relative basis, then risk adjusted with a process that looks at financial viability, asset and management quality.”

Macroeconomic factors are used in sub-sector allocation, the manager adds, while any qualitative issues that arise from company meetings and industry site visits are also considered.

Turning to the final part of the process, Mr Whall explains: “Position sizing is determined using the upside [risk-adjusted target price], with the individual risk contribution analysed to ensure every position contributes to performance without skewing overall portfolio risk. The economic factors, both at a macro and micro level, are fundamentally important. This is and will remain a cyclical industry, but those cycles are not necessarily in sync with the global economic cycles. We anticipate the availability of capital will distort these cycles.”

The manager believes the changing energy supply-and-demand picture is helping him uncover many investment opportunities, “with oil and gas prices currently under significant pressure, yet energy demand is anticipated to increase 50 per cent by 2050”, he points out.

As the fund invests in a fairly specialist sector, it is considered level six out of seven at the riskier end of the risk-reward spectrum, while an ongoing charge of 1.63 per cent applies to the A-accumulation clean retail share class.

Few energy funds have been able to deliver outperformance and Investec Global Energy is no exception. In the past 12 months to July 23, the vehicle lost 36.81 per cent, while its benchmark was down 23.61 per cent in the same period, data from FE Analytics shows. However, the fund has fared better across 10 years to the same date, generating a return of 19.90 per cent, still some way behind the index’s rise of 47.69 per cent.

Mr Whall explains the fund’s recent underperformance: “The change in Opec [Organisation of Petroleum Exporting Countries] policy in November 2014, which was forced on the Saudis when other Opec members and Russia refused to share production cuts, led to the capitulation in oil prices. The WTI [West Texas Intermediate] oil price is down 52 per cent in the past 12 months.”

He says the fund’s heavy exposure to the exploration, production and oil services sectors and its underweight to the more defensive integrated oils has hit its performance. But he remains upbeat: “In spite of the difficult 12 months, the fund has a long track record of outperforming in periods of strengthening oil prices, so we look forward to the next 12 months with expectations for a strong recovery.”

While some managers might be daunted by the current environment for the energy sector, Mr Whall maintains “there has never been a more exciting time to invest in energy”.

He notes: “Sentiment is on the floor following a confluence of events that have weighed on oil market sentiment. But in the background, the exodus of capital from the sector is triggering a correction in production, which – when combined with record levels of demand – will cause the market to tighten relatively quickly. The most recent weakness in the price of oil should ensure 2016 capital budgets are less than 2015 levels, increasing our conviction that the market will be balanced through 2016.”

EXPERT VIEW

Rob Morgan, pensions and investment analyst, Charles Stanley Direct

This energy fund was launched in 2004 and has a long track record for this type of fund, but it has slightly underperformed its benchmark in the period. However, it has previously shown outperformance in rising markets. The managers undertake research on both the underlying commodities and the equities themselves – this combination is the key to adding value in the space. The fund is positioned for recovering oil and energy prices. For investors that believe the supply-demand balance in oil is going to become tighter in the medium and long term, this fund offers well-rounded exposure to the area, with a robust investment process.