Running a hugely successful strategy for the past 20 years, Jonathan Waghorn, co-manager of Guinness Global Energy fund, explains how he does it and the future for oil stocks.
What’s your investment approach at the Guinness Global Energy fund and what makes it different from peers?
Well, we run a value-oriented global energy fund. Where we’re different is that we have done it for nearly 20 years. We run that with a team that’s got nearly 80 years of portfolio management, finance or energy experience and we deliver a product which is an equal-weighted portfolio, so we have a number of equal-weighted positions.
So, those attributes really make it quite different to the peer group in terms of delivering a sector strategy focused purely on the energy sector.
Can you highlight a couple of holdings which exemplify your approach?
So, the fact is that we don’t have any individual stocks that exemplify the approach, the portfolio is really a good example of the approach overall, so we run an equal-weighted strategy. That means that, maybe, for the supermajors we have at the minute, the 14% weight to four supermajors that represent probably 50% weight within the index as a whole.
From the point of view of value bias, you can see we run a portfolio on about 6.5 times EV/EBITDA for 2019 versus the index at about 7.5 times. So, we run a portfolio, it’s a balance of names as opposed to one individual name that really is a star pick for us.
Have you ever altered your approach to address recent poor performance, perhaps to maintain benchmark allocations to oil majors?
I think the process, the approach, it is always continually changing. The philosophy has been pretty consistent, value-oriented towards names that would do well within a strong energy market.
On our process, we continue to do work on oil price sensitivity and that is key for helping us understand balance sheet positions and to improve our stock selection. We continue to do good detailed work on the macro analysis that is always changing.
With respect to the portfolio construction, that’s our thesis, within the financial crisis, we allowed that to flex so that we didn’t stick too rigidly to the underweight positions of the supermajors. We will do what we have to do to look after the returns of the portfolio and key really, behind of all that, is getting the macro position correct, and then the sector allocation. The supermajor weight and the stock selection will then follow thereafter.
Can you explain the fund’s short and longer-term performance relative to benchmark and peer group? What were the main drivers?
So, we’re lucky to have a long-term performance for this strategy, so nearly 20 years, so back to December 1998. Since then, this is a strategy that has outperformed the index by three percentage points per annum over the entire period.
The fund itself was incepted in March 2008 and is number one in the peer group since that point as well, so long-term, good numbers that we’re very proud of. On the shorter-term, over the last three years, oil prices have been on a downward trend, it has been against the energy sector. Our strategy has underperformed the index by four percentage points per annum. Over that period, we’ve been number three in our peer group of seven specialist global energy funds.
Over the slightly shorter-term period since mid-2017 or September 2016, when the energy sector troughed on both occasions, we’ve had good rallies and held a number two position within the peer group since those periods of time.
Will we see the benefits of the oil rally reflected in the fund price?
I would very much hope so. That is the way that the fund has operated over the last 20 years, so we see a strong correlation between energy equities and oil prices.
Bear in mind, at the minute, sitting here today, we have about $75 Brent oil prices, which is fantastic for a spot price, but the long-dated Brent crude oil price still sits in the mid-$50’s. The long-dated oil price is that much more important in defining the valuation of energy equities, so if we see that mid-$50 long-dated oil price move up, then we would expect to see energy equities react and move upwards as well.
If the stockmarket were to price in $60 a barrel as a long-term oil price into energy equities, we’d expect to see, probably, 15% to 20% upside in energy equities. If the stockmarket priced in $70 a barrel as a long-term oil price, we would expect to see 40%, 50%, moving on towards 60% upside in many of the equities that we own.
This is the transcript of a video filmed on 26 April 2018. To watch the original video, please click here.
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