Energy funds topped the performance chart for the second year in a row, but investors should be careful not to expect a repeat of this stellar performance in 2023.
In 2022, BlackRock’s BGF World Energy fund returned 57.3 per cent, Goldman Sachs’ North American Energy & Energy Infrastructure fund returned 54.3 per cent, and TB Guinness’s Global Energy fund returned 49.88 per cent.
This is an unusual achievement in fund management, considering the tumultuous economic and political conditions of the past two years.
Top performing open-ended funds in 2022
Blackrock BGF World Energy
Goldman Sachs North America Energy & Energy Infrastructure
TB Guinness Global Energy
Guinness Global Energy
Schroder ISF Global Energy
AQR Systematic Total Return
AQR Managed Futures
JPM Natural Resources
Blackrock Natural Resources Growth & Income
Source: FE Analytics/Ben Yearsley
However, investors looking to gain exposure to this sector as a result of its good performance should proceed with caution, as these funds are unlikely to repeat their stellar performance.
The high returns seen in energy funds in the past two years was mainly the response to two events.
Firstly, in 2020, the pandemic and resulting lockdowns led to a huge decrease in energy consumption, as industries closed and workers stayed at home.
The drop was so drastic that the price of oil briefly turned negative, meaning traders were forced to pay others to take the oil they had bought off their hands.
Secondly, the re-opening in 2021 and Russia’s invasion of Ukraine in 2022 (which led to supply issues in Russian energy provisions, which are relied on by many European countries), drove energy prices up.
It is worth noting that oil prices in particular have only recently climbed back up to pre-pandemic levels.
Investors should be mindful of the reasons they are investing in energy funds or stocks, said Ben Seager-Scott, head of multi-asset funds at Evelyn Partners.
“We are still pretty positive on energy broadly as a theme,” he said.
“It is likely there will be continued disruption to supply chains, and the war in Ukraine does not look like it's ending any time soon…which is probably going to keep pressure on energy prices.”
OPEC is incentivised to keep the oil price high enough to make a good profit, not so high it kills off global economic activity, he added.
Furthermore, valuations of energy companies are currently attractive, with the price to earnings ratio sitting at about 15 times.
Whether or not to increase exposure to energy stocks in a portfolio depends on the potential investor's starting point.
“If you’ve not had any exposure previously, [energy stocks are] a good part of a balanced portfolio, they look attractive in terms of valuation, and they also provide a little bit of a hedge if you do have surging inflation," Seager-Scott said.
Motivations for investing
Those who buy energy stocks or funds looking for a repetition of the past two years of performance are likely to be disappointed.
This may be the case for UK investors, two-thirds of whom are willing to prioritise short-term gains from their investment portfolios, according to research from Schroders.
Three-quarters of investors in the UK said they feel forced to take more risk than they would like, showing a pronounced shift away from long-term strategies, most likely linked to the cost of living crisis.