Headlines have been dominated by the low oil price over the last year or so, and a vast majority of the time the proceeding articles have harboured a bearish undercurrent.
Many investors worry about the impact the price drop will have on oil exporters, which could in turn worsen today’s global growth slowdown and pile deflationary pressure onto central banks.
While slightly more optimistic investors argue that the low price should boost consumer spending across oil-importing regions, many have been left disappointed by the amount of economic growth coming through in these areas.
Amid the panic, however, there are some investors that have increased their exposure due to attractive valuations and long-term investment views - these include a number of investment professionals and fund managers.
In an article published this morning, in fact, Henderson UK Alpha’s manager Jamie Ross told FE Trustnet that he has been increasing his oil exposure over the last 12 months while stocks are cheap as he believes that the price could be set to re-balance soon, pointing out that Chinese consumption doesn’t account for as much of the oil market as people think.
“Non-Chinese demand for oil is growing nicely – last year was a very strong demand year,” he said.
“We’re more constructive on oil because we see the global demand environment as okay and would expect demand to grow slightly this year, but at the same time we’ve seen OPEC led by Saudi Arabia trying to pump as much oil as they possibly can and that’s had a dramatic impact on the oil price, but there’s not too much more they can do now.”
Out of the 406 UK equity funds within the Investment Association universe, 75 of them are overweight oil & gas compared to the FTSE All Share index, which has a weighting of just under 10 per cent in the sector.
As to be expected, 65 of these have provided a negative return since the start of 2015, when oil dropped to below $40 per barrel for the first time since February 2009.
Source: FE Analytics
Ten of these have provided a positive return over this time period though, despite the fact that the FTSE All Share index has made a loss of 53 basis points over the same time frame.
The top-performing fund that is overweight oil is JOHCM UK Opportunities, which is headed up by FE Alpha Manager John Wood. Since the start of 2015, it has provided a total return of 8.02 per cent, outperforming its average peer in the IA UK All Companies sector by 6.88 percentage points.
Performance of fund vs sector and benchmark since 2015
Source: FE Analytics
The five crown-rated fund is £1.6bn in size and has a concentrated portfolio of 27 stocks including a 4.4 per cent weighting in BG Group, which is its fourth-largest holding and makes up part of the fund’s 10.31 per cent oil weighting.
Wood chooses companies that can generate their own bottom-up growth and have strong balance sheets and will sell any companies that look expensive on three-year forward earnings estimates. He also has a keen eye on valuation and will hold high levels of cash if he feels there is a lack of opportunities.
This process has stood the fund in good stead over the longer term as well, as it has delivered a top-decile total return over five and 10 years.
JOHCM UK Opportunities has a clean ongoing charges figure (OCF) of 0.81 per cent and yields 2.79 per cent.
The second top-performer since 2015 has the biggest oil overweight out of all 10 funds at 13.09 per cent. Liontrust UK Growth is managed by FE Alpha Manager duo Anthony Cross and Julian Fosh and has provided a total return of 7.88 per cent since the start of 2015, outperforming its peer average and FTSE All Share benchmark by 5.81 and 8.42 percentage points respectively.
The managers are well-known for their ‘Economic Advantage’ investment process, which involves selecting stocks that either have intellectual property, have strong distribution channels or have significant recurring business. Over their tenure, Liontrust UK Growth has delivered a top-quartile total return and is in the top decile for its annualised volatility and its risk-adjusted returns, as measured by its Sharpe ratio.
The £207m fund has a clean OCF of 0.9 per cent and yields 2.37 per cent.
Next up is RWC UK Focus, which has delivered a smaller total return of 3.05 per cent but has nonetheless outperformed the FTSE All Share since 2015. The fund, which has a 10.58 per cent oil weighting, is headed up by John Innes and holds a concentrated portfolio of 30 stocks.
Since its launch in March 2012, the four crown-rated growth fund has provided a total return of 43.72 per cent compared to its IA UK All Companies sector’s average return of 35.14 per cent and its FTSE All Share benchmark’s return of 26.32 per cent.
Performance of fund vs sector and benchmark under Innes
Source: FE Analytics
Hot on the heels of the £81m fund, which has a clean OCF of 1.06 per cent, is BlackRock UK Equity which has provided a total return of 2.97 per cent since the start of 2015. It’s co-run by four managers – James MacPherson, Imran Sattar, Roland Arnold and Nick McLeod-Clarke – and aims for growth by investing in large-cap stocks.
The fund has 10.13 per cent in oil and gas, as well as 26.16 per cent in financials, 16.48 per cent in consumer products, 12.66 per cent in services and 10.47 per cent in industrials. It also has smaller weightings in healthcare, basic materials, telecom, media & technology and utilities.
Since its launch, the fund has behaved fairly similarly to the FTSE All Share benchmark, but it has nevertheless outperformed it by 3.12 percentage points with a total return of 31.41 per cent. It has a clean OCF of 0.92 per cent.
Performance of fund vs sector and benchmark since launch
Source: FE Analytics
There are only two more UK funds within the IA universe that have achieved a return of more than 1 per cent since the start of 2015 while also remaining overweight oil – these are AXA General Trust and R&M UK Dynamic Equity.
The former is managed by Keith Robinson aims to growth its income as well as its capital, although its yield fell in 2014 and 2013. Despite a smaller loss than its average peer over the past year, the fund has been in the third quartile over three and five years.
The fund’s top 10 holdings are all UK mega-caps and include the likes of Vodafone, BT, HSBC, AstraZeneca and British American Tobacco. Its 10.82 per cent oil weighting consists of equal 3.5 per cent weightings in BP, BG and Royal Dutch Shell. AXA General Trust has an ongoing charge of 1.03 per cent and an underlying yield of 2.69 per cent.
R&M UK Dynamic Equity has five FE crowns and is headed up by FE Alpha Manager Philip Rodrigs and deputy-managed by fellow FE Alpha Manager Daniel Hanbury.
The £51m fund has only been managed in this formation since 2016, as Hanbury decided to step down to deputy position and allow Rodrigs to take over the helm.
It has an 11.55 per cent weighting in oil and, over Hanbury’s tenure, it has provided a total return of 43.87 per cent, outperforming the FTSE All Share by 3.18 percentage points. It has a clean OCF of 0.85 per cent and yields 2.82 per cent.
