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How to protect your portfolio from rising geopolitical risk

23 April 2014

BlackRock strategists say that energy stocks should protect portfolios in the short and long term.

By Thomas McMahon,

News Editor, FE Trustnet

Investors should buy into the energy sector to protect their portfolios from rising levels of geopolitical risk, according to Russ Koesterich, global chief investment strategist at BlackRock.

Data from FE Analytics shows that specialist energy funds have done very well so far this year, with an uptick in performance in recent weeks as the Ukraine crisis has escalated.

Koesterich (pictured) says he expects the outperformance to continue, and suggests overweighting the sector.

ALT_TAG “We are advocating an allocation to energy stocks, which have outperformed the broader market year-to-date,” he said.

“In addition to being one of the cheaper sectors and a good hedge should inflation eventually start to rise, the sector provides another important feature today: a potential hedge against rising geopolitical risk.”

“Should events in Ukraine continue to deteriorate and lead to an escalating series of sanctions and higher oil prices, energy stocks are likely to perform better than the broader market.”

Data from FE Analytics shows that the FTSE All Share Oil & Gas sector is up 1.07 per cent in 2014 compared to a gain of 0.35 per cent on the broader market. The average UK growth fund has lost 1.29 per cent.

Performance of indices and sector in 2014
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Source: FE Analytics

Koesterich says that the oil price is being pushed up by a number of factors, with the crisis in the Ukraine chief among them. This is supporting the prices of producer stocks.

“By most fundamental measures, oil prices should be declining,” he said. “In fact, the Energy Information Administration announced last week that oil inventories in the U.S. are approaching an all-time high.”

“Furthermore, data showed the biggest one-week increase in stockpiles in 13 years, with inventories rising by 10 million barrels to 394.1 million, only 3.4 million below the all-time peak reached in May 2013.”

“While strong U.S. production and rising inventories should keep a lid on prices, events outside the United States are putting upward pressure on oil.”


“First, production in several key Middle Eastern and North African producers — Libya, Nigeria and South Sudan — are well below potential, helping to limit global supplies.”

“In addition, fears of escalating violence in eastern Ukraine and potential sanctions against Russia, the world's second-largest oil producer, are pushing prices higher.”

“While equity investors may be ignoring events in Ukraine, oil traders are not, with oil prices hitting a six-week high.”

The oil price is only one factor in the performance of energy funds, however. Our data shows that they have managed to produce positive returns in a period when the oil price has been falling.

Year-to-date Brent Crude has fallen 2.27 per cent, while all the energy-focused funds in the IMA universe have produced positive returns.

The best-performing energy fund over that time, the Guinness Global Energy fund, has made 6.79 per cent while even the worst-performing, SF Fundamental Energy, has managed to return 1.55 per cent.

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Source: FE Analytics

Guinness Global Energy is largely focused on the US, with 62 per cent of its assets listed there and 19.3 per cent in Europe, with just 7.6 per cent in the UK.

The second best performing fund has been Schroder ISF Global Energy, which has 67.5 per cent in the US and 15.47 per cent in the UK.

A number of UK growth and income managers have been buying into the UK sector in recent months, with many citing low valuations as a key reason.

Royal London UK Growth has 20.4 per cent in the oil and gas sector, with 5.2 per cent in Shell.

Majedie UK Focus has 18.73 per cent while UBS UK opportunities has 18.5 per cent.

In the IMA UK Equity Income sector UBS Equity Income has 18.8 per cent in the sector and SWIP UK Income 16.9 per cent.


FE Alpha Manager Stephen Bailey, who runs the £382m Liontrust Macro Equity Income fund, has 9.76 per cent in the sector, including positions of 4.93 per cent in BP and 4.83 per cent in Shell, his two largest positions.

He says that oil and gas companies have strong intangible assets that make them attractive long-term investments, including the expertise of their employees which is hard to duplicate.

Bailey says that management at Shell has been cutting back on investment plans having suffered a period of over-optimistic expansion.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.