This £9m energy-focused investment trust is run by the New City Investment Managers team. It was launched in February 2008 and aims for capital growth with income.
Robert Crayfourd, portfolio manager of New City Energy, says: “The trust differentiates itself via its focus on shale production, predominantly weighted to the US, allowing unitholders to gain exposure to what we view as the most prospective shale assets via a UK-listed vehicle.”
The investment process combines a top-down view with a detailed bottom-up value approach to picking stocks.
Mr Crayfourd says: “We apply a strong top-down view when allocating to sectors, then use our strength as stockpickers to pick those companies we view as the best valued to play those sectors.”
He adds: “The US shales have changed the energy space, but it should be noted there is huge variation between the companies – in both the basins and where they are located in those basins. They provide lower break-evens than most of the offshore prospects we see today, but the key difference is the shorter cycle from capex to production, allowing the producer to hedge the production one to three years before deciding to allocate the capital. This enables a powerful manufacturing process in oil that reduces the speculative risk.
“Importantly, as the technology improves, costs continue to decline and recoveries increase. This is the opposite of the longer term trends in offshore production.”
This focus on shale production was put in place by the team in 2014, on noting the long-term structural changes seen in the market.
| EXPERT VIEW - Oliver Stone, head of research and deputy portfolio manager, Fairstone Private Wealth |
| New City Energy is a specialist, actively managed closed-ended fund investing in the energy sector. The fund is run by a team of specialists at New City and invests in quoted and unquoted equities and fixed income across various oil and gas subsectors. Given its investment focus, the fund has had a tough time over the past two years having had a high exposure to shale oil and gas companies, but more generally it has been trending downwards in price since early 2011. The fund’s discount remains wide at around 22 per cent to net asset value [as of August 15], and is set to remain volatile given ongoing global geopolitical risks. |
There has been little turnover in the portfolio recently, according to the manager. “We had anticipated the potential for a weaker summer during what is normally a quieter and more volatile period of the year. We believe the energy market ran too hard, too fast at the start of the year,” he confirms.
In spite of an improvement in fundamentals, Mr Crayfourd believes the oil market may not be “balanced” until 2017.
As of March 31, ongoing charges of 2.43 per cent apply to the investment trust.
The trust’s performance has suffered owing to a turbulent oil market, data from FE Analytics shows. Over three years to August 8, New City Energy returned -54.5 per cent, while the AIC IT Commodities and Natural Resources sector delivered an average return of -37 per cent. In the past year, the trust’s performance is back in positive territory, having generated a 5.5 per cent return, but it is behind the peer group average return of 21.5 per cent.
Mr Crayfourd suggests the portfolio’s defensive positioning hurt it slightly year to date on a relative basis. “Although now we have seen oil weaken over the past few weeks, more recently it has been faring well on a relative basis,” he acknowledges.
“We will be positioning more aggressively to take advantage of the improving fundamentals we see later this year and into 2017.”
Shipping company BW LPG, which transports propane gas, has been the portfolio’s most disappointing holding. Following growth in exports from the US, domestic prices were supported, while prices in Asia were dampened. “This lowered the effective day rate on the differential in propane pricing between the two regions, weakening shipping day rates,” Mr Crayfourd explains.
“Our favourite US shale basin is the oil-rich Permian Basin in Texas. The target is the source rock for the more conventional targets of the early 1900s. There are multiple stacked plays, with more rigs focused here than any other basin in the US,” he observes.
“Three of our top-four holdings are focused in the Permian Basin – Occidental, Pioneer and Parsley – and they are currently seeing strong returns as the market wakes up to the strength of this basin.”
