Chelverton manager David Horner has made a rare move into the oil and gas market amid what he sees as an increased number of initial public offering (IPO) opportunities for small-cap investors.
Mr Horner, who manages the £42m Chelverton Small Companies Dividend Trust and the £490m Chelverton UK Equity Income fund, said he tended not to hold any oil and gas firms, but had been tempted by two stocks.
“We tend to only participate in around two IPOs a year, but we’re already at four in 2017. I can’t put my finger on why, it’s a little bit luck of the draw and we have seen some interesting cases,” Mr Horner explained.
The trust now has a 2.2 per cent oil and gas weighting as a result of taking part in the IPOs of Diversified Oil & Gas and Anglo African Oil & Gas, and both production companies are looking at expansion.
The fund has avoided the sector due to its volatile nature, and because smaller companies were often more involved in exploration than production, he said. But Mr Horner added that the two stocks had demonstrated relatively stable revenue growth plans.
The FTSE All-Share Oil & Gas index outperformed the FTSE All-Share by 43 percentage points in 2016 but has struggled year-to-date. It is down 7.9 per cent versus a 6 per cent rise for the All-Share.
However, Mr Horner remains unperturbed. He said: “The breakeven oil price [for Anglo African] is only $12. When a sector falls out of favour we can add layers gradually.”
The two oil and gas stocks were initially joined in the fund by another IPO, UP Global Sourcing, but the manager sold out of the stock within a month. Mr Horner sells shares when their yield falls below 2 per cent; he noted that UP Global’s yield had plummeted as the share price rose sharply on entering the public market.
Similarly, fast action was taken on financial services provider Curtis, which saw a sharp price rise and yield fall, forcing the fund to sell. However, as the share price fell back and the yield rose back above 2 per cent, Mr Horner decided to buy back into the company.
“We will go in and out as we know the companies well and know when they are undervalued,” he added.
Strong share performance following the Brexit referendum prompted the trust to rollover its zero dividend preference shares in January. The company will seek to boost its assets under management to £100m through an ordinary share rights issue this autumn.
The Chelverton Small Companies Dividend Trust has returned 54 per cent over three years, versus a 21 per cent average for the AIC UK Smaller Companies sector and 31 per cent for the FTSE Small Caps ex-IT benchmark, according to FE Analytics.