Energy sector equities are having a good year. In recent years, however, investors in the sector have had a rough time of it. With the rise of sustainable investing and the greater awareness that the world needs to move away from fossil fuels to put an end to climate change, investments in companies that are active in the field of fossil fuels are under a magnifying glass.
However, energy stocks are having an extremely good year, noted Ronald van Genderen of Morningstar in his contribution for this week. Although the MSCI World index already achieved an excellent return of 26.99 percent over the first 11 months, the energy sector did considerably better, with a return of 46.61 percent for MSCI World/Energy.
This even makes it the best performing sector in 2021. Investors in the energy sector needed it, because the past few years have been miserable. What about 2020, when global equities returned 6.33%, but shares in energy companies plunged 37.12%?
Last year’s dramatic performance was not an isolated event. Over the past decade, the energy sector has outperformed the global equity index in only two calendar years: this year and in 2016. Not surprisingly, therefore, there has been a marked underperformance over the past ten years, with the MSCI World recording an average annual return of 14.25%, while the energy index has had to make do with a paltry 1.18%.
The importance of the energy sector is therefore rapidly waning. Measured against the weight of the sector in the MSCI World index, the picture is clear. At the end of November 2011, shares in the energy sector still made up 12.09% of the index, but this has now dropped to 3.18%. This is also due to the growing importance of the technology sector, which saw its weighting increase from 11.59% to 20.88%.
However, the most important explanation is that only 53 companies active in the energy sector are now included in the world share index. Ten years ago, there were 113. Today, we are talking about a combined market capitalisation of EUR 1,898 billion, compared to EUR 2,644 billion a decade ago.
With the rise of socially-responsible investing and greater awareness that the world needs to move away from fossil fuels to stop climate change, investments in fossil fuel companies are under scrutiny. Institutional investors are increasingly asking themselves whether they still want to invest in the sector.
A telling example is the announcement by Dutch pension fund ABP in October this year that it will sell all its investments in companies that produce fossil fuels in the next 18 months. Until then, the civil service pension fund had chosen to use its influence as a shareholder to try to persuade companies to adopt a more sustainable course. However, the Netherlands’ largest investor now stated that it “does not see sufficient opportunity to use its influence as a shareholder to get these companies to make the switch from fossil to sustainable energy.”
ABP is not alone in this view. A recent report by the fossil fuel divest-invest movement indicated that 1,485 institutions worldwide, with combined assets under management of 39.2 trillion dollars, have now decided to divest their interests in the energy sector.
However, it is notable that the assets under management of funds in Morningstar’s Energy Equity category have hardly declined over the past decade. In 2011, these funds managed EUR 10.7 billion, while at the end of November this year, the figure was EUR 9.7 billion - just EUR 1 billion less. Although the assets under management fluctuate greatly, the category recorded 1.8 billion in inflows last year, while the counter for this year to November stands at 1.5 billion in new investor money.
In this week’s Top 5, an overview of the five best-performing funds in the Morningstar Energy Equity category based on their 2021 performance through November.
Lacey
On the first step, we find an active fund, Schroder ISF Global Energy. This fund has been managed since 2013 by the experienced Mark Lacey, who also heads Schroders’ commodities team. He focuses on exploration and production companies in the traditional oil and gas sectors, but can also include companies in the portfolio that deal with infrastructure, utilities and renewable and alternative energy.
Van Genderen: “However, the latter industry is hardly reflected in the 36-position portfolio, in which the largest positions are held by Royal Dutch Shell, BP and Cabot Oil & Gas. Among the standouts are Range Resources (217 per cent), Devon Energy again and Ovintiv (164 per cent).”
Belgium
