Investors turned off by energy
OIL and energy fund investors have seen their returns slide along wi t h the price of a barrel of Brent crude. As the black stuff suffered a severe slump in price to fall below $63 this week – it was hovering at $110 as recently as June – even wizened savers, used to volatility in commodities and natural resources, could be forgiven for wondering if it was time to bail out.
Some have lost almost a third of their cash in a year. Schroder Global Energy fund is down by 28.4pc over the past 12 months, and if you had invested £1,000 in Junior Oils Trust in December 2013, you would have £744 left.
BlackRock World Mining is down 44pc over three years. Investors in mainstream UK funds have also been hit too.
About 17pc of the FTSE 100 is comprised of companies involved in oil and gas exploration, and 14pc of the FTSE AllShare.
A much smaller 0.8pc of the FTSE 100 is made up of airlines, an industry where profits are heavily influenced by oil prices.
Laith Khalaf, senior investment analyst at Hargreaves Lansdown, says: ‘Energy funds are very specialist and should only be considered by investors with a strong stomach. The ups and downs can be extreme.’
Many in the City suggested the recent lurch was not a signal for panic and that prices could soar again. Tom Becket, chief investment officer at Psigma Investment Management, says: ‘Although it’s likely the oil price could remain in the doldrums for some time we would forecast it to rise above $80 next year.’ Anyone determined to stay invested in oil as part of a broader investment portfolio is still advised to trust their money to a fund expert. Becket l i kes the Artemis Global Energy f und because it invests in smaller energy companies such as MEG Energy and Carrizo Oil & Gas, which should do well if commodity prices take a turn for the better.
But he warns it won’t be a smooth ride. Smaller companies can be hit harder in bad times – because their share price is lower they can be more prone to ups and downs, and because less money is invested in them, sometimes it can be difficult to sell the shares.
Investec Enhanced Natural Resources is a slightly less risky option. It has a large proportion of its money in big firms such as Glencore and BHP Billiton. It also invests in companies outside of the oil and gas sector into assets such as precious metals, industrial metals and even fertiliser.
This helps further spread the risk so investors aren’t overly exposed to the fortunes of just one type of commodity.
Once you start to branch away from funds which focus solely on oil there are lots of esoteric options.
A range of infrastructure funds pour money into solar investments, wind turbines and other alternative types of energy. Greencoat UK Wind, which invests in wind farms such as Cotton Farm in Cambridge- shire and Sixpenny Wood in Yorkshire, has returned 11.4pc over the past year. While solar panel investment fund Foresight Solar has returned 8.2pc.
But Khalaf warns: ‘The assets are highly illiquid and the sector is distorted by government subsidies which could be withdrawn.’
He suggests a cheaper way to profit from the fortunes of different commodities is by investing through a tracker fund, which simply aims to match the performance of a given sector.
For example the db X-Trackers MSCI World Energy tracker follows the World Energy Index, investing in more than 100 energy firms across the globe. Its annual charges are around 0.45pc a year, and over the past year it has lost 11.7pc, about half of some energy funds.
Becket says: ‘There are undoubtedly still plenty of risks with the energy sector, but investors can take comfort that they would be taking a contrarian stance in a hated sector where only misery is expected.’
It is a risky strategy, but investors who believe oil and other commodities will bounce back will be tempted to strike now while the price is low. Those less inclined to risk losing money should steer clear.