Oil is trading at around $50 a barrel on the back of oversupply issues and OPEC’s refusal to support prices with production cuts. FE Analytics shows the S&P GSCI Brent Crude Spot has fallen more than 50 per cent over the past six months, while MSCI World Energy index has shed close to 20 per cent.
Performance of indices over 6 months
Source: FE Analytics
Funds and investment trusts investing in this area have fared slightly worse than the index, with the average energy fund in the Investment Association universe losing 22.74 per cent over six months while the average fall in the IT Commodities & Natural Resources sector has been 23.10 per cent.
Despite this, Numis analysts have chosen an energy investment trust as one their alternative investment picks for 2015, arguing that this one in particular should not see its return impacted too heavily by movements in the oil price.
The £807m Riverstone Energy fund was launched in October 2013 to make private oil & gas investments, with a focus on the exploration and production and midstream sectors.
Over six months, every trust in the AIC’s IT Commodities & Natural Resources has lost money due to depressed investor sentiment towards energy in general. However, Riverstone Energy has fallen just 3.42 per cent, compared with the average fall of 23.10 per cent. As a point of comparison, the worst performing trust over this period has dropped 49.96 per cent.
Performance of trusts and sector over 6 months
Source: FE Analytics
Since launch, the trust has committed around 70 per cent of the capital raised with some 31 per cent already been invested. Its 10 commitments have been to energy companies spanning conventional and unconventional oil and gas activities in the Gulf of Mexico, continental US, western Canada, the UK and Norway.
Riverstone Energy tends to invest in management teams that parent company Riverstone, which specialises in buyout and growth investments in the exploration & production, midstream, oilfield services, power and renewable sectors of the energy industry, has successfully backed in the past.
Furthermore, the trust recently committed $125m to Riverstone Credit Opportunities, which is a newly created portfolio company that was formed to take advantage of a perceived dislocation in the leveraged capital markets for energy companies.
Numis’ analysts said: “Importantly, oil price is not the key driver of the fund’s returns and Riverstone believes that it can make good returns in a falling oil price environment. Most of the fund’s capital has not yet been invested. Furthermore, the group appears well placed to exploit the environment, with considerable firepower to invest in distressed operations, as illustrated by the formation of its Credit Opportunities strategy.”
Since launch on 24 October 2013, the investment trust has significantly outperformed its peers with a loss of 7.67 per cent, against the sector’s average decline of 27.31 per cent. As the graph below indicates, it’s held up well over the turbulence of the past few months relative to its rivals.
Performance of trust vs sector since launch
Source: FE Analytics
According to FE Analytics, this performance over the turbulent period means the trust is the best performer in the sector over one year as well as over six months. Over three months, the fund is up 4.60 per cent while its average peer has dropped 11.29 per cent.
It also looks attractive relative to its peers on several other metrics. Its Sharpe ratio, which measures risk-adjusted performance, is the best of the sector at -0.1, while it is first quintile for volatility and maximum drawdown, which shows how much an investor would have lost if they bought and sold at the worst possible times.
Annualised volatility since launch has been 10.26 per cent, against the sector’s 11.30 per cent and the MSCI World Energy’s 19.20 per cent; maximum drawdown is 14.18 per cent, compared with 28.79 per cent for the sector and 25.75 per cent in global energy stocks.
The fund has no benchmark, but we’ve compared against the MSCI World Energy indexto give some indication of how energy equities have done.
However, Numis’ analysts point out that the trust’s fee structure is one downside. It has a management fee of 1.5 per cent of net assets plus a performance fee of 20 per cent of realised profits on an asset by asset basis, although Riverstone will reinvest its share of the performance allocation net of taxes into ordinary shares.
But they added: “On the other hand, this is a unique mandate within the investment companies sector [and] the management team has strong credentials. We see significant upside potential once the fund is fully invested and through the J curve.”
Riverstone Energy is currently trading on a 17.61 per cent discount, which is well above its average one-year discount of 8.73 per cent. Over the past year it has traded between a 20.25 per cent discount and a 2.26 per cent premium.
