Many equity managers have been looking to oil and gas stocks for vale opportunities as the sectors have lagged the UK and US markets, and the UK stocks in particular have beaten the market this year.
Richardson says that on GARS’ two to three year time horizon he expects the position to make even more money as management in the sector carry out drastic reforms.
Performance of BP and Shell in 2014
Source: FE Analytics
“GARS doesn’t have a contrarian strategy but we often end up by being contrarian by having a reasonable timeframe of three years unlike most of the market which is more like three to six months,” he said.
“Oil majors are an interesting trade based on valuations because they are close to a 20 year low.”
Richardson says that an equally weighted basket of the six largest oil companies in the world would have a AA credit rating and a yield of 3.9 per cent growing at 2 to 3 per cent in real terms, which he describes as highly attractive characteristics.
On valuations metrics such as price to book the stocks also look highly attractive, he adds.
“They are massively out of favour with the investment community but we thought we could see some changes coming through, and this key to what we look for,” he said.
“Anyone can identify low-valued stocks but the issue is identifying which aren’t value traps.”
“We think it is key we are seeing a change of strategy after a period of underperformance and the companies have come under pressure from shareholders.”
“Total was the first to announce a change in strategy and has been the best performer of the group, and there have since been similar announcements from BP, ENI and Shell and they have seen a boost to performance.”
Richardson explains that companies also look more attractive to investors thanks to the falling price of oil services which has made many of their internal projects more profitable. Low rates of return have been a bugbear of investors for some time, he says.
“I think this is one of the sectors where, together with a reasonable yield, over our two to three year time frame we will be rewarded strongly as improving fundamentals are appreciated by the market.”
Standard Life GARS is one of the largest retail funds on the market, but data from FE Analytics shows that inflows have been slowing.
Over the past three months the fund was only the second most popular IMA Targeted Absolute Return fund, behind Newton Real Return, the first time it has not been the highest-selling for some time.
This follows a period of sluggish performance. The portfolio, which aims to return cash plus 5 per cent each year with volatility between 4 and 8 per cent, was hit hard by the “tapering tantrum” of May last year and has yet to recover its gains.
Performance of fund vs sector and benchmark over 1yr
Source: FE Analytics
The GARS team have also been adding to a relative position in large cap US tech against small caps, implemented with futures positions on the NASDAQ and Russell 2000 indices.
Relative performance of indices in 2014
Source: FE Analytics
Many tech stocks have suffered in recent months as those on high valuations fell back to earth. The smaller cap stocks have been most affected, having run up to higher levels.
This was an event predicted by Stuart O’Gorman, manager of the Henderson Global Technology fund as far back as November of last year.
O’Gorman said he was shifting his portfolio into large cap tech stocks to protect himself from an expected correction, and this is a strategy many managers have employed since the sell-off occurred in March.
Richardson says that the GARS fund has been topping up its position, believing that there is still a valuations disparity to be exploited.
“We are bullish on the US economy but if you look at the expectations for earnings growth on the Russell 2000 it is around 30 per cent this year which looks far too optimistic and the valuation is quite high,” he said.
This position also has the benefit of hedging the fund’s bullish stance on the US economy, Richardson explains.
As 90 per cent of the earnings on the Russell 2000 are from the US domestic economy but the NASDAQ is more international, this position should do well if the US economy does poorly to the rest of the world, hedging some of the risk taken elsewhere on the portfolio.
He also points out that the P/E on the NASDAQ index is on its five year average relative to the S&P500, meaning that there is no reason to be concerned about a bubble in the tech sector as a whole.
Click here to learn more about absolute return investment strategies, with the FE Trustnet guide to absolute return.
