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Investors in energy funds

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

Those with a particular interest in a theme - such as fracking, or renewable energy in one form or another - or that are looking for an inflation hedge should consider energy funds, according to Darius McDermott, managing director of Chelsea Financial Services

He says, however, that specialist energy funds or investments should play a relatively small part in the portfolio of most investors.

Adrian Lowcock, senior investment manager for Bristol-based Hargreaves Lansdown, says in the UK demand for energy is expected to grow in the next 20 to 30 years so it is a theme that is generating a lot of interest from long-term investors.

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But he agrees with Mr McDermott that most investors probably do not need to buy specialist funds.

Mr Lowcock says: “It is only if you want energy over a broad, global fund that you would probably invest in specialist funds and then perhaps it is only for high-risk investors.

“It is quite a specialist area so it is usually invested in off the back of a trend or something. It is not going to be core to a portfolio. In larger portfolios you could perhaps afford 1 per cent or 2 per cent in it.”

Gavin Haynes, managing director of Whitechurch Securities, recommends no more than a maximum of 5 per cent in energy funds in a suitable investor’s portfolio.

He says: “You must be comfortable with a high level of volatility. For us, if you do want to gain exposure to that area it is best to do so through a specialist fund manager with expertise in that area.”

But Will Riley, co-manager of Guinness Global Energy fund, disagrees with the advisers.

He says energy companies can play an important role in the portfolio of investors with a long-time horizon who are seeking to harness the world’s major growth themes.

For investors keen on growth themes, Mr Riley says energy companies could be one of the major beneficiaries of rising energy demand and energy prices driven by the world’s demographic and economic shifts and the growth of the emerging Asian, African and South American economies.

For investors who are worried about inflation, Mr Riley says energy equities could also provide a useful hedge against its effects on an investment portfolio, and against the long-term rise in household energy bills.

“With energy prices being one of the main drivers of inflation, energy equities can also provide a useful hedge against inflation in an investor’s portfolio. Energy equities tend to rise in line with structural shifts in energy prices.”