The Junior Oils Trust has been removed from the Wealth 150 list of our favourite funds across the major sectors. It was added in October 2005 and initially performed well, but recent performance has been disappointing.
Negative investor sentiment towards the oil sector has meant higher-risk small and medium-sized oil and gas companies have struggled to raise the capital they need to invest in growing their business. They are unable to rely on banks for funding as they often don't lend to smaller oil companies unless they already have reserves and production. The collapse of the oil price during the second half of 2014 exacerbated the difficult operating environment as the key product for many of these companies was suddenly worth much less, negatively affecting earnings.
Angelos Damaskos, the trust's manager, seeks small and mid-sized oil companies which are cash generative, with high oil reserves, and robust balance sheets which can support the company through periods of low oil prices. However, the recent sell-off has been indiscriminate, with investors paying little regard to company quality. The manager's approach has therefore afforded little shelter in a falling market.
As part of our analysis of the trust's long-term performance, we developed a customised small and medium-sized oil companies index based on the geographical allocation of the trust. Our analysis in relation to this benchmark suggests the manager's stock selection has been inconsistent and at times has detracted heavily from returns, particularly over the past few years. High ongoing fund charges of 1.09% p.a. (after HL's 0.25% saving) create a further hurdle for the trust to overcome.
Since launch in October 2004, the trust has delivered growth of 16.7%. Over the same period the Brent Blend Oil price has risen 47.6%* in sterling or 24.8%* in dollars despite the recent slump. The FTSE 350/Oil & Gas Index has risen 82.2%*, although this includes the performance of large oil companies and their dividends, where the fund has very little exposure. Our own constructed benchmark has risen 15.6% between 30/10/2004 to 30/04/2015.
Please remember past performance is not a guide to future returns. *Lipper IM to 01/05/15
|Annual percentage growth|
| May 10 -
| May 11 -
| May 12 -
| May 13 -
| May 14 -
|Brent Blend Oil (in sterling)||34.19%||-2.59%||-13.88%||1.02%||-34.52%|
|FTSE 350/Oil & Gas||13.10%||-0.80%||-1.85%||11.81%||-8.78%|
The portfolio is highly concentrated at 42 holdings, with the top ten positions accounting for nearly half the trust. This means each stock could have a significant impact on performance but is higher risk.
According to Angelo Damaskos, it is generally believed the cost of producing each barrel of oil is around $75. While oil trades below this level, supply is likely to be reduced as companies scale back investment in new oil fields and suspend production at existing unprofitable ones. Supply is also likely to drop from the natural decline of existing fields. At the same time he suggests reputable forecasting institutions, such as the International Energy Agency, expect demand for oil to continue to grow for the foreseeable future.
Angelos Damaskos believes following the recent sell off the worst is now behind us and there is potential for the oil price to recover strongly, benefiting the higher-quality oil-producing companies he is targeting.
Companies with the best exploration and production potential, operating in stable regions, with a tight control on costs, should be well placed for profit growth in periods of commodity price rises. They could also potentially offer some relative capital shelter compared with lower-quality companies when share prices fall. Fund managers capable of identifying such companies should be able to outperform their respective peers and benchmarks over the long term. However, as our quantitative analysis of commodity-focused funds has become more sophisticated over time, it has become increasingly clear, in our opinion, that few managers in these areas have the ability to consistently add value for investors. We have removed the Junior Oils Trust from the Wealth 150 as we have lost conviction in the manager's ability to add value for investors over the long term.
Many companies in the energy, mining and resources sectors are lowly valued and any sustained rebound in underlying commodity prices could see company share prices recover, although there are no guarantees. The Junior Oils Trust, similar to many specialist funds, is an effective way to access a niche area. Other alternatives include ETFs.
Want our latest research sent direct to your inbox?
Our expert research team provide regular updates on a wide range of funds.