The substantial fall in the oil price – which now stands at $51 a barrel of Brent crude – was one of the major surprises of 2014.
A combination of the US shale gas revolution, over-supply issues and the OPEC countries’ decision to not step in and manage the market all meant that the S&P GSCI Brent Crude Spot index lost a staggering 44 per cent in sterling terms last year.
Performance of index in 2014
Source: FE Analytics
This slump has had a major impact on the global economy and financial markets. While Russia has borne the brunt of the collapse, the FTSE 100 is home to two of the biggest oil companies in the world – BP and Royal Dutch Shell – meaning the fall in the oil price was a major headwind for the UK equity market and was the major driver of the December sell-off.
While both those companies started 2014 in good shape, their share prices have fallen considerably over six months with investors in Royal Dutch Shell losing 14 per cent over that time while BP is down 22 per cent.
There are still clearly concerns surrounding the future of the oil price as many experts have predicted that it could stay lower for longer.
However, if investors expect it to rebound from its current level in the not-so-distant future, there are a number of UK funds which have substantial positions in the oil and gas sector through longstanding holdings in that part of the market.
In this article we look at five of the better known funds with a large allocation to oil stocks, namely UBS UK Equity Income, M&G Recovery, Investec UK Special Situations, Liontrust UK Growth and Schroder UK Alpha Plus.
Funds’ weighting to oil and gas sector
Source: FE Analytics
Steve Magill’s UBS UK Equity Income fund has the largest weighting to the oil and gas sector out of any portfolio in either the IA UK Equity Income or IA UK All Companies sectors, with it accounting for 17.6 per cent of its total assets under management.
The manager is taking a very concentrated bet as well. Our data shows that position is split between just two companies – a 9.4 per cent weighting to BP and an 8.2 per cent weighting to Royal Dutch Shell.
That sector positioning has hurt performance over the short term, as you would expect, and the fund has been the third worst performing portfolio in the IA UK Equity Income sector over six months with losses of 6.57 per cent.
The fund also sits in the bottom decile since Magill took over the portfolio in April last year.
M&G Recovery, which is managed by the long-serving Tom Dobell (pictured), is one of the higher-profile funds to have a chunky weighting to oil companies. The £5.3bn fund, which is a value orientated portfolio focusing on out of favour stocks, has 16.61 per cent in the oil and gas sector.
BP is Dobell’s largest individual position, accounting for 6.79 per cent of his portfolio, while Royal Dutch Shell is his fifth largest making up 3.74 per cent of the fund.
Like UBS UK Equity Income, M&G Recovery struggled last year and was bottom decile with losses of more than 9 per cent, adding to its underperformance in 2013 and 2012. However, with returns of 135.07 per cent, the fund is a top quartile performer and has comfortably beaten the FTSE All Share since Dobell took charge in March 2000.
Another value focused fund to have a heavy weighting to the sector is Alastair Mundy’s £1.4bn Investec UK Special Situations fund.
Mundy is one of the best rated contrarian fund managers in the business and will often only buy into companies which are hated by the wider market. Both BP and Royal Dutch Shell feature in his top 10 and combined make up 13.3 per cent of his fund. Mundy also holds smaller satellite holdings in oil and gas stocks lower down his portfolio.
The manager also has exposure to other out of favour companies, such as Royal Bank of Scotland, Tesco and gold miners like Fresnillo, Newmont Mining and Barrick Gold.
Though the fund has comfortably outperformed since Mundy took charge in August 2002, the manager’s contrarian positioning meant the fund ended 2014 in the bottom quartile of its sector with a loss of 1.23 per cent – despite its large cash weighting.
Performance of fund versus sector and index in 2014
Source: FE Analytics
Philip Matthews’ Schroder UK Alpha Plus fund, which had been run by Richard Buxton for more than 10 years up until 2013, is also quite concentrated as it holds 7.06 per cent in Royal Dutch Shell and 5.6 per cent in BP. Lower down the portfolio, Matthews also has a smaller holding in Premier Oil.
Again, like Mundy and Dobell’s funds, Schroder UK Alpha Plus’s loss of 1.51 per cent meant it was bottom quartile last year.
The four crown-rated Liontrust UK Growth fund, which is run by the FE Alpha Manager duo of Anthony Cross and Julian Fosh, has slightly different exposure to the oil and gas sector than the other portfolios mentioned on the list.
Cross and Fosh hold BP in their top 10, with the company making up just 4 per cent of the portfolio. They have 4.8 per cent in Royal Dutch Shell and the rest of their 14.3 per cent sector exposure is made up of companies such as Petrofac, Amec Foster Wheeler and Wood Group.
That less concentrated position could well explain why it outperformed the sector last year, unlike M&G Recovery, Investec UK Special Sits and Schroder UK Alpha Plus, though its gain of 1.01 per cent was still less than that of the FTSE All Share.