Oil stocks are too cyclical and require too much capital to grow, making them a bad investment whatever happens to the oil price, according to Nick Train, who runs the £1.3bn Finsbury Growth and Income trust.
He said the trust has suffered slightly in performance terms of late as the oil price has risen, leading to a boost to the share prices of companies such as Shell and BP, which the Finsbury Growth and Income trust doesn't own.
Mr Train's trust has returned 87 per cent over the past five years, compared with 46 per cent for the average trust in the AIC UK Equity Income sector for the same time period to 15 May.
But Mr Train said: "We are not and never have been invested in these companies. Not because we don't admire them. In terms of what they do they are formidable. It is just that what they do involves a commodity and is highly capital intensive.
"While the stuff we work with, by contrast, tends to be about brands and low capital intensity. Since 1998 – 20 years – BP's shares are up less than 20 per cent, while Shell's are up less than 70 per cent (which is not even 3 per cent per annum compound), although that ignores the rich dividends flows from both.
"Nonetheless this has not been a particularly rewarding period for investors in big oil. In our opinion to bet on the next 20 years being a better time requires one to make macro-economic or, even worse, geopolitical judgements that we do not feel qualified for."
Mr Train said in the past companies such as BP and French company Total used to have the advantage of strong political support from their respective governments when seeking to negotiate with countries in emerging market economies that had oil reserves, but this influence is now less potent making it more costly for big oil companies to acquire assets.
The fund manager said if the oil companies continue to perform well it will help the performance of the entire stock market and he is invested in London Stock Exchange Group, Hargreaves Lansdown and Rathbones, all businesses he claimed would benefit by proxy if the UK market does well.
Anthony Rayner, who jointly runs four multi-asset funds at Miton, said oil may be one of the few effective defensive assets right now, as it offers protection from rising inflation, and its upward price movements in recent months have not particularly been the result of economic growth, but rather of political uncertainty, so investing in oil offers protection against a significant risk faced by investors in the current climate.
Adrian Lowcock, investment director at Architas, said: "Nick Train has delivered a very strong period of outperformance and it would be foolish to bet against him.
"Performance doesn't go in a straight line, he may under perform, but he is someone who has always said you should invest with him for the long term. He has a very clear investment style, but he is a top manager and you shouldn't buy the top managers for the short-term or for one style, doing that is trying to time the market and that is very difficult.
"If there is underperformance, instead of selling Mr Train's fund, it would be to buy a fund that complements it, like the Old Mutual UK Alpha fund, managed by Richard Buxton."
david.thorpe@ft.com
