Investments  

Energy: An evolving and volatile industry

This article is part of
Alternative Assets - June 2014

Of the 12 funds listed in the IMA sectors with energy in the title, some specifically look to target alternative, clean or new energy.

However the sector is a somewhat volatile industry, with both traditional and new energies being cost and labour intensive, sometimes with years of lead times, while disasters such as the BP Deepwater Horizon disaster in 2010 can have a dramatic effect on reputation as well as the balance sheet.

The returns of the 12 funds identified in a quick search of the IMA sectors for energy funds demonstrate the wide range of performance.

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For the three years to 20 June 2014 the best performing fund of the 11 with a three-year track record – Guinness Global Energy - delivered a return of 19.52 per cent.

In contrast at the other end of the scale, the Schroder ISF Global Small Cap Energy recorded a loss of 25.17 per cent, according to FE Analytics.

This range of returns shows not only the diversity of energy funds in terms of their returns, but also in the underlying investments.

For example for the 12 months to 20 June, the Guinness Global Energy remains in the top two of the 12 energy funds with a return of 30.15 per cent, while the previously poorly performing Schroder ISF Global Small Cap Energy fund soars up to third place with a positive return of 29.89 per cent.

Meanwhile the energy industry is constantly evolving, whether it is the issue of stranded assets and how energy and mining companies will deal with these, or the growing area of shale gas and oil and the controversial ‘fracking’ process, the risks and the opportunities abound.

The latest BP Statistical Review of World Energy 2014 states that 2013 saw an acceleration in the growth of global energy consumption, in spite of a stagnant global economy.

It notes: “Emerging economies nonetheless continue to dominate global energy demand, accounting for 80 per cent of growth last year and nearly 100 per cent of growth over the past decade.

“Regionally, energy consumption growth was below average everywhere except North America. Energy production continued to be impacted by geopolitical events.

“Oil production in Libya suffered the world’s largest decline in the face of renewed civil unrest and the production of oil and gas was disrupted in a number of other countries as well.

“In the face of these disruptions and heightened risks to supply, average oil prices exceeded $100 per barrel for a third consecutive year, despite massive supply growth in the US.

“Driven by massive investment in shale and other ‘tight’ formations, the US saw the world’s largest increase in oil production last year, offsetting the numerous disruptions seen elsewhere and keeping prices stable.

“Indeed, the US increase in 2013 was one of the biggest oil production increases the world has ever seen.”

But while the report paints a relatively positive picture of the global energy sector, Frances Hudson, investment director and global thematic strategist at Standard Life Investments, warns “if you look at the numbers rather than the words it doesn’t perhaps look as good”.