For the first quarter of 2020, Mark Lacey’s Schroder ISF Global Energy fund was the worst performing fund in Q1, but 30 days later it emerged as the best performer in the Investment Association universe. So, what happened?
Having turned in a loss of 60.83 per cent for the first quarter of 2020, the $303.7m fund bounced back in April, making a total return of 44.30 per cent.
Nevertheless, it has been a tough year for the strategy, as the chart below shows, year-to-date the fund has made a loss of 44.08 per cent, more than its MSCI World/Energy benchmark (35.58 per cent).
Performance of fund vs sector & benchmark YTD
Source: FE Analytics
Running a mid-cap biased strategy Lacey – who has managed the fund since 2013 – said there would be periods when the fund would have a higher volatility or beta than its more benchmark-hugging peers.
In fact, looking at the fund’s 10-year cumulative volatility to last month-end, the Schroder ISF Global Energy fund had the worst showing of all 173 funds in the IA Global sector at 32.82 per cent. The MSCI World/Energy benchmark had, in comparison, volatility of 19.52 per cent. 
Alongside this, Lacey (pictured) said that the fund, and the global energy sector as a whole, has undergone a period of underperformance – for the sector - going back as far as 2014 with the global energy sector enduring massive mark downs since then.
But, all of this could be on the cusp of change, with the fund’s turnaround in performance somewhat anticipating a reversal in oil prices, a factor which largely dictates the global energy sector’s performance.
“Now where is the fund set up for the next few years? The fund is in an amazing position,” Lacey explained.
The fund’s future performance and the global energy sector as a whole largely depends on one thing according to Lacey, whether or not there is an oil price recovery.
“I don’t want to pull any wool over your readers eyes,” Lacey said. “The fund is of high beta, and a mid-cap bias. If you do not believe in the oil price recovery, then those mid-cap companies and the whole sector will continue to struggle.
“However, if you do believe in the oil price recovery and the structural underinvestment then our fund is extremely well-positioned.”
The changeable oil price has been a dominant theme in 2020 as the Russia/Saudi Arabia price war at the start of the year combined with a fall in demand caused by the coronavirus pandemic to send prices lower. This climaxed in April when – for the first time ever – the price of US West Texas Intermediate (WTI) oil futures contracts dropped below $0 per barrel over storage concerns.
But the Schroders manager said he doesn’t believe the sector is in for another major downturn, although he does see it beginning to go through major transitional change as demand for more renewable energy sources increases.
This means that the oil supply & demand crisis will go through more of a U-shaped recovery, which will take longer to exit due to the unprecedented market backdrop.
However, Lacey said even when it does return, oil demand will likely remain at a lower level than before.
The drive for cleaner energy and the advent of renewable, alternative energy resources especially in transportation will mean that less oil is going to be needed, the manager said.
Internal combustion engine cars account for 60 per cent of global energy demand, according to Lacey, and the uptick of electric vehicle popularity will hit oil demand hard.
And it’s only the oil companies who have realised this and have started to move to an ‘integrated’ system, as Lacey called it, and are supplying these alternatives who will really have a future.
“The horizon beyond 2020 is much more uncertain [for oil],” he explained.
“So what it sets up for is underinvestment in the oil & gas sector in the short term, which will cause a short-term squeeze but at the same time you have the energy transition coming at a very fast pace.
“The oil sector because of its exposure to transportation has probably one last investment cycle in it, and this is potentially a two-to-three year window. Beyond that window, demand pressures will start to offset supply dynamics and it makes it more difficult.
“The integrated companies get this but their entire focus for the next 10 to 15 years is about making this smooth transition into the renewable energy sector,” Lacey said.
Although it won’t be easy, with many companies in the renewable sector already very well-established, and many oil companies have the added pressure of making the transition without diluting returns to shareholders.
“These oil companies are not dead they just need to transition with the energy transition at the same time,” he added.
As such it is the “long-term structural winners in the mid-cap space” in the Schroder ISF Global Energy, which are going to thrive in the normalised recovery period, according to Lacey. These are the companies he feels will come through this crisis stronger and perform well in the oil price recovery, or cope the best if the worst case scenario of no oil price recovery comes to fruition.
Energy services company John Wood Group, Lacey said, is a perfect example of a company that isn’t 100 per cent dependent on its oil & gas business having already started work within the renewable energy sector.
Another example the manager highlighted was Schlumberger, one of the largest oil services companies in the world, that has recently traded at around ‘book value’ for the first time since he began investing in the company in 1996 and therefore represents a highly valuable and cheap opportunity.
Performance of fund vs sector & benchmark under manager
Source: FE Analytics
Lacey has managed Schroder ISF Global Energy since September 2013. During this time the fund has made a 69.62 per cent loss compared with a 23.64 per cent fall for the MSCI World/Energy index and an 80.60 per cent gain for the average IA Global peer. It has and ongoing charges figure (OCF) of 1.04 per cent.