Energy stocks have dominated 2022; in the year-to-date, to end of August, the MSCI World/Energy index is up 34.8% (in USD terms). Putting this into perspective, this compares with a 17.6% fall for the Morningstar Global equity index over the same period.
The energy share price remains elevated, but August saw Brent crude (-12.3%) put in its worst monthly performance since November 2021. Crude has fallen for three months in a row, linked to reduced Chinese demand given local Covid related lockdowns, a global slowdown that is bordering on recession.
A decade ago, energy stocks stood at 11% of the Morningstar Global equity index, and tumbled to under 3% by late 2020. As a result, they’ve been increasingly ignored by fund managers, especially with climate discussions becoming more prominent. But recent dynamics have seen them back on the radar in some quarters:
- GQG’s Global Equity fund 2% exposure in March 2021, turned to 12% come year-end, and then doubled from there by the end of Q1 2022.
- Ninety One Global Strategic fund increased its energy exposure to a 2.5% overweight, driven by adding Exxon Mobil in June 2022. The 3.3% position in the portfolio took the stock straight into the top five holdings.
- M&G Global Dividend has long-standing exposure in energy, having held Keyera and Gibson Energy for nearly a decade. These are midstream companies, which own and operate pipelines, storage terminals and processing facilities, which the fund manager believes offer attractive long-term prospects, driven by their exposure to some of the most prolific basins in North America. They both yield around 6% and Rhodes sees the dividend as secure.
- Blackrock’s energy team who run BGF World Energy have recently reigned-in their large overweight to exploration and production companies. They also took trimmed US exposure, taking it to an underweight, and added to some European names, given that US energy companies had rallied more than their European counterparts. The team has a bias towards higher quality oil producers which they expect to benefit the most from a stronger for longer oil and gas price environment, and the need for increased Liquified Natural Gas (or LNG) output to replace Russian gas exports into Europe.
“For global equity managers to still be sitting on the side lines when it comes to energy, is on ESG grounds. Some Article 9 funds even invest in oil and gas companies that are transitioning, therefore growing revenue from renewables while still operating their legacy fossil fuel business.
“We see some positives with a ESG lens for Exxon, having responded to calls to bring in more outside voices to its board and announcing missions reduction targets. The firm also invest in low-carbon technologies – but each of these efforts is measured and keeps oil and gas production at the core. So much so, they think this strategy is unlikely to win praise from environmentally oriented investors.” – Jon Miller, Director of Manager Research, Morningstar