InvestmentsJan 10 2023

What’s the outlook for energy funds in 2023?

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What’s the outlook for energy funds in 2023?
The Troll A natural gas platform, operated by Statoil ASA, seen through a helicopter window, stands in the North Sea, Norway (Krister Soerboe/Bloomberg)

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

Name

Return %

Blackrock BGF World Energy

+57.33

Goldman Sachs North America Energy & Energy Infrastructure

+54.33

TB Guinness Global Energy

+49.88

Guinness Global Energy

+48.77

Schroder ISF Global Energy

+48.57

AQR Systematic Total Return

+46.35

AQR Managed Futures

+37.52

JPM Natural Resources

+33.03

Blackrock Natural Resources Growth & Income

+32.69

Winton Trend

+32.37

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.

Past 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.

We are still pretty positive on energy broadly as a themeBen Seager-Scott, Evelyn 

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.

“I’m not sure these same funds will make it to the top 10 in 2023,” Ben Yearsley, director at Fairview Investing, said.

The changing case for energy exposure

Demand for energy stocks has also been decreasing.

Energy stocks have been historically avoided by active stock pickers as the sector is hugely impacted by macro factors which are hard to predict.

Business fundamentals only go so far when the performance of these companies relies on these macro factors, Seager-Scott said.

The use of energy stocks within portfolios has changed too, and may well continue to change depending on how energy companies are taxed in the UK.

I’m not sure these same funds will make it to the top 10 in 2023Ben Yearsley, Fairview Investing

A lot of stockpickers in the past used energy stocks for their income benefits, as they have historically paid large dividends.

But that trend has been fading out as other forms of income options have appeared amid rising interest rates.

The combination of this and concerns over the environmental impact of oil companies in particular have driven some investors away from the sector.

Oil prices

For those who are maintaining their exposure to energy, the price of oil will dictate much of the sector’s performance.

“For the moment, analysts seem inclined to believe that oil (and gas) prices are going to fall in 2023 and 2024,” said Russ Mould, investment director at AJ Bell.

“They are forecasting a one-third fall in operating profit from the West’s seven oil majors between 2022 and 2024, equivalent to a drop of $120bn (£101bn).”

The high likelihood of a recession, the continued invasion of Ukraine, a rush to fill gas storage levels this summer and the long-term trend towards renewables will all contribute to lower oil prices in 2023.

However, if China continues to open its economy (which is one of the larger net importers of oil globally), low levels of investment in supply, and a rise in the capacity of the US’s strategic petroleum reserve could all push the oil price up.

The jury is out on which one of these scenarios will win out.

“There are few assets as likely to make a mug of investors (as well as central bankers and policymakers) as oil,” said Mould.

sally.hickey@ft.com