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Driving performance of energy investment

This article is part of
Guide to Energy Investing in the 21st Century

Will Riley, co-manager of Guinness Global Energy fund, says: “The performance of energy equities and energy funds is largely unaffected by the local dynamics of UK energy markets in terms of price, weather-driven demand, regulation, the debate over shale gas and fracking, etc.

“Other local investment opportunities may exist in these areas, but the performance of most energy equities and funds is driven by supply and demand at a global macro level.”

Mr Riley says ultimately energy – specifically global supply versus demand – is one of the world’s major long-term growth themes. This is prompting investment into areas such as shale gas fracking, and renewable energy which most consider to be growth area over the coming 50 years.

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Gavin Haynes, managing director of Whitechurch Securities, says one of the key considerations about investing in energy at the moment is shale gas and how that could transform things both here and overseas.

UK ministers are backing shale gas drilling, with chancellor George Osborne halving the tax on firms’ profits.

During his Autumn statement, Mr Osborne said: “The country that was the first to extract oil and gas from deep under the sea should not turn its back on new sources of energy like shale gas because it’s all too difficult.”

Many environmental groups have launched challenges against extraction of shale gas. Greenpeace has even launched legal action against extraction of shale gas, known as fracking. It estimates that up to 20 million acres (32,000 square miles) of countryside are being assessed by the government.

Mr Haynes says: “In the UK it is still very much in its infancy but in the US you can see already it has had a significant impact on energy prices. That does create opportunities but by being able to substitute oil that creates uncertainty.

“The advent of shale gas really does have the ability to possibly change the outlook for energy investing. If you are going to invest you need managers who understand the valuations of businesses.”

Andrew Wilson, head of investment for Towry, says investors who expect the performance of energy funds to mirror the utility bills they have dropping through their letterboxes need to understand that this will not be the case.

He says: “For equity bills we all have to pay for evolving our energy infrastructure so our bills are going to go up but that is not necessarily going to translate into the same level of profits for the supply companies. That [increased prices] is partly paying for the roll out of improved infrastructure.

“You might argue that you do not want to invest in some of the energy companies anyway as you might question how strong their management is given their somewhat ham fisted approach to PR.

“Any time you have to communicate with them you might question if they are particularly slick organisations that you would want to invest in.”