Among the top five actively managed mutual funds in the energy sector that are tracked by Morningstar, the BGF World Energy and NN (L) Energy funds stand out as top performers when considering the year-to-date performance of this type of funds.
Black gold has long been the black sheep for investors, but in 2022 it proved to be the only refuge in a market weighed down by rising inflation. However handsome the profits of oil and gas companies may be, it does not entice investors to (re)consider the energy sector for now.
Negative oil prices, a scenario that probably no investor had thought possible, did become a reality for a short time on 20 April 2020 when the corona outbreak rapidly developed into a pandemic that completely crippled oil demand. In the first quarter of 2020, the MSCI World/Energy index went down over 40 per cent as a result of the global lockdowns, closing the year with a record 37 per cent loss.
The future of some oil and gas companies had become extremely uncertain, generous dividends were forcibly reduced or cancelled entirely, the green revolution increased pressure on fossil fuel use, and investors increasingly ignored the sector due to stricter sustainability criteria. The sector seemed doomed.
Maligned oil giants
How different the world currently looks for the maligned oil giants. Structural underinvestment, coordinated cooperation within the OPEC+ cartel of oil-producing countries, a strong rebound in economic activity after the coronal shockdowns and the sharp impact of the Russian invasion of Ukraine on the oil and gas market have helped oil and gas companies’ profits jump to record levels.
For instance, Exxon Mobil posted a profit of almost $20 billion for the third quarter of 2022, the largest quarterly profit in the company’s 152-year history, Chevron reported its second-highest net profit, Equinor raised its special dividend and BP announced more share buybacks after profits doubled.
However, soaring energy prices are a major factor behind the highest inflation in decades, making them a thorn in the side of politicians. For instance, partly in the interest of the mid-term elections, US President Joe Biden, when visiting Saudi Arabia, requested that the planned production cut by OPEC+ be postponed. A tactic previously employed by rival Donald Trump in 2018, when he tweeted “The OPEC monopoly must get prices down!” ahead of the mid-term elections. Neither attempt met with a response.
‘Solidarity levy’
The record profits achieved partly thanks to geopolitical turmoil put the sector under the political magnifying glass. Joe Biden called the profits excessive and is seeking higher taxes for war profiteers, something that has already taken effect in Europe. Brussels introduced a 33 per cent “solidarity levy” on excess profits, while the UK introduced a similar tax in May, which was raised from 25 per cent to 35 per cent in the Autumn Statement and extended from the end of 2025 to March 2028.
Political pressure is not harming sentiment for energy shares for now. The MSCI World/Energy index rose as much as 68 per cent this year through the end of October. That follows a strong recovery in 2021 in which the index rose 50 per cent in value. Measured from the low point in October 2020, the cumulative return is almost 225 per cent. Despite these insane returns, investors are not warming to energy stocks. Only the first quarter of this year saw net inflows, but in the following two quarters these inflows were already largely wiped out. With this, the sector seems to have definitely fallen out of favour with investors.
BGF World Energy
The top five actively managed mutual funds in the Morningstar Sector Energy category, ranked according to their year-to-date returns as of end-October 2022, is headed by BGF World Energy which achieved a 66.36 per cent return. The fund, which has a Morningstar Analyst Rating of Neutral, is managed by Alistair Bishop and Mark Hume, who have worked together since March 2018. Bishop’s experience as a manager on this fund dates back to 2015 and he specialises in renewable energy and clean technology. Hume’s experience is complementary as he has dedicated his career to sifting through large-cap energy stocks, while energy analyst Tao Ly, who joined the duo in 2021, boasts 10 years of experience in the energy sector. The managers take a flexible approach to idea generation, combining top-down and bottom-up analysis. The highly concentrated sector in which a few players dominate makes it difficult for the managers to generate a high active share, which historically hovers around 40 per cent. Although the managers have an eye for the entire market-cap spectrum, investments in smaller companies are more difficult to implement from a liquidity perspective. The team took full advantage of share price gains in 2022, including through Hess Corp, Tourmaline Oil Corp, Kosmos Energy and Devon Energy, whose share prices more than doubled.
NN (L) Energy
With only one basis point difference, NN (L) Energy ranked second. This fund also benefited not only from spectacular share price gains by integrated oil majors such as Exxon Mobil, Chevron and BP, but also from positions in oil service companies such as Schlumberger and Halliburton, exploration & production companies such as Magnolia Oil & Gas Corp and EOG Resources, and refining and marketing organisations including Valero Energy and Marathon Petroleum.
Jeffrey Schumacher is director manager research at Morningstar. Morningstar analyses and evaluates investment funds based on quantitative and qualitative research. Morningstar is one of Investment Officer’s knowledge partners and ranks five mutual funds or providers every week.
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