Energy fund experts have failed investors - look elsewhere

There are plenty of positive signs for the energy sector, says Max King, even if its long-term future is one of declining output. But specialist energy fund managers are asleep at the wheel.

Analysts should stop worrying about the weather and focus on fundamentals

This content is subject to copyright.

Specialist energy fund managers are asleep at the wheel investors should look elsewhere

"The Stone Age did not end for a lack of stone and the oil age will end long before the world runs out of oil," predicted Sheikh Yamani, Saudi Arabia's oil minister, in the 1970s. This forecast once appeared outlandish, but has come to be a consensus view as the world seeks to move towards alternative energy.

Advertisement - Article continues below

However, while the UK's carbon emissions are reported to have fallen to levels last seen in Victorian times, and the government is committed to banning the sale of new diesel and petrol cars by 2040, global demand for oil continues to rise, and with it output. World oil production, growing at a trend rate of about 1% per year, is currently a little over 80 million barrels a day. The crude price, which dropped from over $100 a barrel to $30 between 2014 and early 2016, has since rebounded to around $75.

Opportunity to invest

This ought to represent a good environment for oil companies, but it's not that simple. Spot (current) prices are more volatile than futures prices, at which companies sell most of their oil. Futures markets remained well above $30 a barrel in early 2016 and now discount falling prices. Governments increase taxes when prices are high, to collect a windfall, and lower them when they drop, to encourage exploration and production. Meanwhile, gas has become increasingly important to energy companies, with improved technology driving costs down, and its price has rebounded by far less.

Advertisement - Article continues below
Advertisement - Article continues below

As a result, the energy sector has only returned about 30% since the start of 2016, having fallen by 33% in the previous two years. This should present an opportunity for investors; declining production from areas such as the North Sea needs to be replaced and companies have become much more cautious about high-risk, high-cost projects after Shell wrote off $7bn when it abandoned deep-water drilling off Alaska. Fracking, which is being taken up around the world, is lower cost and lower risk, but still requires the expertise that international companies can provide.

Energy fund managers must do better

Unfortunately, the specialist energy fund managers appear to be asleep at the wheel. The Guinness Global Energy Fund has underperformed the sector benchmark by 3% per year over the last five years, the BlackRock World Energy Fund by 3.4%, and the Investec fund, not even the worst in the sector, by 7.3%. It is not hard to see why. Their investment commentaries are full of analysis of the oil price and the macroeconomic and geopolitical factors that influence it, and their record of forecasting the oil price is abysmal. They should focus on the companies, the competence of their management, their strategy, their returns on equity and their record on investment, but that seems a forlorn hope.

Advertisement - Article continues below

This is a pity, as there are plenty of positive signs for the sector, even if its long-term future is one of declining output. That would imply lower investment, higher cash-flow and increasing payouts to investors. Exploration and production is increasingly dependent on internationally applied technology and human expertise; with less need to replace reserves, the oil majors have been making more money with oil at $60 a barrel than they did at $100. Fossil-fuel companies could be more successful than is expected in their forays into carbon-free energy production, but with no replacement for aviation fuel in sight, forecasts of the end of oil look premature.

The unattractiveness of the specialist funds leaves investors with the choice of investing directly or via generalist funds. The managers of these may not be experts in the global energy market, but they should be better at identifying companies that will add value for investors and generate good returns. In this sector, we've had enough of experts.



Global Economy

What escalating tension between Iran and the US means for oil prices

The tension between the US and Iran is unlikely to mean all-out war in the Middle East. But markets may be getting a little too complacent about its e…
6 Jan 2020

Rising output will keep a lid on the oil price

Oil exporters’ cartel Opec gave further encouragement to the bulls this month after agreeing to new production curbs.
20 Dec 2019

Brace yourself for pricier oil

Global growth, and hence demand for oil, could surprise on the upside next year, leading to a bounce in the oil price.
29 Nov 2019

Why has the oil market taken the Saudi attack so calmly?

After an initial spike in the oil price, the market seems to have shrugged off the attack on Saudi Arabia’s oil infrastructure. John Stepek asks if it…
23 Sep 2019

Most Popular

Investment strategy

How John Maynard Keynes learned the folly of market timing

In an extract from his book The Sceptical Investor, John Stepek explains how the great economist John Maynard Keynes came a cropper when he first star…
25 May 2020
Emerging markets

A new lease of life for the Brics

Emerging markets are having a surprisingly good crisis. Their long-predicted rise will now continue.
24 May 2020

Battling volatility: The benefits of an active manager

SPONSORED CONTENT – Alastair Wilson, managing director of Close Brothers, on the advantages of active investing in times of crisis.
21 May 2020