Stocks in the UK’s commodities and oil & gas sectors have witnessed significant falls over recent years but companies here are still not attractive enough for Jupiter UK equity manager Steve Davies.
Recent years have seen a general downward trend for many commodities, which has negatively impacted the share prices of the companies that mine them out of the ground. And since the summer of last year, the plunge in the oil price has hampered oil & gas companies.
Performance of indices over 2yrs
Source: FE Analytics
More recently, conditions have been more turbulent for these out-of-favour sectors. While the FTSE All Share has lost 5.61 per cent over the past six months, the oil & gas index has shed 12.60 per cent and the miners have lost an eye-watering 35.17 per cent.
But they have also led the rally of the past few weeks. On a one-month view, the FTSE All Share has risen 3.96 per cent but the FTSE All Share Mining index is up 6.54 per cent and the FTSE All Share Oil & Gas index has surged 10.21 per cent. 
Amid all this turmoil, however, Davies has failed to find any opportunities for his Jupiter UK Growth fund. The manager primarily focuses on two types of stock: those showing strong future growth potential and those where the share price is under pressure but recovery potential can be seen.
The recent falls of the oil and commodity sectors could lead to some investors considering them as candidates for the second category, but Davies is far from convinced that they offer an attractive opportunity at the moment.
“I’m still zero weighted in oil, we’ve been like that since 2013. Share prices have already moved down a fair amount but there’s just not enough distress factored into these prices yet to get me excited,” he said.
“I’m firmly in the camp that the oil price stays down at these kind of levels probably for longer than the oil companies would like. The longer that persists the more people are going to question the dividend payments of these companies, but right not they’re just not exciting enough for me.”
As the graph below shows, the price of oil has halved since the start of June last year. Factors contributing to this include slowing demand and the failure of OPEC to cut supply in order to force prices higher, but few forecasters are expecting the price of the commodity to rise strongly any time soon.
Performance of index since 1 Jun 2014
Source: FE Analytics
Davies has a similar view when it comes to the wider commodities space. Our data shows the S&P GSCI Commodity Spot index, which is broad measure of the prices of energy products, industrial metals, agricultural products, livestock products and precious metals, is down 30 per cent over one year and 40 per cent over three years.
There are myriad factors at play but two of the common reasons for the plunge in commodity prices over recent years have been global oversupply and slowing economic growth in China, which is the world’s biggest consumer of a number of raw materials.
“I’m struggling to see how commodity prices move up substantially from here,” Davies said.
“That seems like a pretty dangerous assumption – they could indeed go lower. We haven’t really seen enough distress to get us excited about them as recovery opportunities. Never say never; we keep doing the work on them but we’re still zero weighted in commodities.”
Davies has managed the £1.6bn Jupiter UK Growth fund since January 2013, over which time it has made a 51.40 per cent total return. By comparison, the average fund in the IA UK All Companies sector has made 32.60 per cent while the FTSE All Share has risen 24.77 per cent.
Performance of fund vs sector and index under Davies
Source: FE Analytics
As well as avoiding commodities and oil stocks, the manager has a bias towards the UK domestic economy within his portfolio. This involves decent weighting to banks; some 28 per cent of the portfolio is in financials stocks, compared with the 26.14 per cent allocation in the FTSE All Share.
“UK banks are a substantial position for the fund. We’ve seen good progress this year in terms of profits improving, capital bases being rebuilt and regulators getting more comfortable with those,” the manager said.
“The key from here is really substantial dividends being paid – that’s the last step on the path to respectability. [Lloyds] should become a core holding for the income funds that used to hold Lloyds about 10 years ago.”
Lloyds is the fund’s largest holding at a chunky 7.1 per cent of assets, followed by Dixons Carphone, Barclays, Legal & General and Royal Bank of Scotland.
Jupiter UK Growth has a clean ongoing charges figure of 1.03 per cent.
