Concerns regarding oil and mining stocks are sensible at the moment despite the fact that valuations are cheap, whereas nerves on China could lead to investors missing out on stellar value plays, according to Alex Crooke.
The manager, who runs Henderson’s £738m Bankers Investment Trust, has recently reduced his 9 per cent cash weighting as he is seeing opportunities in developed market equities, particularly Japan and Europe, and is looking to play the strengthening of the Chinese consumer.
The plummeting price of oil and commodity prices and the varying levels of growth slowdown across the globe has led to a divergence of market performance over the last year.
Performance of indices over 1yr
Source: FE Analytics
This is apparent in Crooke’s portfolio, with Europe, Japan, the UK and North America providing the trust with significant positive returns in 2015 while Asia Pacific ex Japan and emerging market stocks dragged the portfolio’s performance down by 4.6 and 31.2 per cent, respectively. 
The manager (pictured) has also been playing sectors that tend to thrive best in developed economies and has active overweights in consumer services, financials and technology versus the trust’s FTSE All Share benchmark, while remaining underweight in oil & gas and basic materials.
What may come as a surprise to investors though, is that the manager’s largest holding is currently BP, which is one of the world’s seven ‘supermajor’ oil companies.
The stock, which currently has the ninth-highest dividend yield in the FTSE 100 index at 8.36 per cent, hit turmoil on Tuesday when it announced that it would axe thousands of jobs due to a reported annual cost profit of $5.9bn, which is a 51 per cent fall from last year.
Consequently, the stock fell by 8.6 percentage points.
Performance of stock vs index over 1month
Source: FE Analytics
“I'm very shy of oil still. Unfortunately my largest holding is BP so [Tuesday’s annual report] was a bit of a disaster, but it had held up very well,” Crooke admitted.
“I think I own BP because to my mind they ‘get it’ a bit more than other companies in the sense that, in the new world, alternatives use will keep increasing and we will need to use less oil as time goes on.”
“I think these companies maybe need to treat it like tobacco in a funny way. The end game of tobacco products is that there will be no tobacco smoked in 10 years’ time. So you monetise the process, you throw off cash, you don't spend too much innovating the product and you make sure you produce dividends for that period. Maybe the oil companies need to do a bit more of that.”
To balance his holding in BP, the manager’s second-largest holding is in Delphi Automotive, a UK-based automotive parts manufacturing company.
The company specialises in fuel efficiency and hybrid technology, and has released a line of products entitled Powertrain which are 25 times cleaner in terms of emissions compared to technologies used in the 1990s.
“70 per cent of all oil goes into cars, which is why I also own Delphi,” Crooke explained.
“Delphi manufactures electronic products for cars and if cars become electric, Delphi will win. I think that's the way it's going to go - I'm not a big bull over the long term on oil.”
The manager doesn’t hold any US or European oil majors and holds almost half of the weighting that its benchmark does in oil & gas, as he believes that it’s an area to remain cautious of at the moment.
He says the single greatest reason that the oil price has plummeted is the misbalance of supply and demand, and he points out that when markets are in oversupply, nobody wants to cut production in case the balance reverts and one company alone fills the gap caused by undersupply.
“Politics are playing a part as well, but at the end of the day, it’s just a classic example of markets in oversupply and game-playing, which means you’ve got a very odd situation that is not clearing at the moment,” he said.
“US production year-on-year is flat, so they actually haven’t cut into the American production. It will start falling though because the rig count, particularly on shale, is about a third of what it was a year ago.”
“The way I was always told it works having visited these places, is that if you’re a rigger and you drill your hole and you frack it, then it takes two years for the [natural] decline rate to make it unprofitable to hold.”
Crooke says that this drilling largely ceased last year but low oil prices have led to companies slashing their production and exploration budgets. This means that, at some point, companies will have to begin drilling once more and could struggle further.
“I think budgets are painful. At $30 per barrel - forget cost, it's unproductive, but you need to get through those forward sales that you've committed to because they are profitable,” he said.
“I think that in the second half of this year you'll see a substantial fall in production and that should put a bit of upward pressure on the oil price, but the politics are still there in terms of what Saudi is doing and whether Iran will just fill the gap created when US shale exits.”
In contrast, one struggling area of the market that the manager does like is the Chinese consumer space, which he says is being overlooked due to market nerves.
He points out that retail sales in the region have started to pick up since the summer slowdown and that, currently, Chinese retail sales year-on-year have been growing by between 10 and 12 per cent since last August.
This, he says, is a significant level of growth, particularly when you compare it to US sales which have been growing by between 2 and 3 per cent over the same time frame.
“I'm bit less bearish on China. I think there are, as always with China, lots of stories going on, but generally speaking you want to be close to the consumer,” he continued.
“I think the China story is all about focusing the economy away from consumption and spending and more towards the consumer and environmental challenges, it's not as bad as we think in my opinion.”
While Bankers Investment Trust has been in the bottom quartile over the last three and six months, it has provided a top quartile return of 50.56 per cent over the last five years, outperforming its sector average and benchmark by 19.19 and 25.68 percentage points respectively.
Performance of trust vs sector and benchmark over 5yrs
Source: FE Analytics
The trust has also managed to grow its dividend for 49 consecutive years, which is second only to the City of London Investment Trust by one year within the AIC universe.
It is 1 per cent geared, yields 2.9 per cent and is trading on a 4.2 per cent discount. The trust has ongoing charges of 1.48 per cent.
