Performance Review 2005Ute Speidel: "In 2005 the fund performed well, and would have performed even better than benchmark if not for the significant depreciation in value of the US dollar during that time. This performance was driven by the fund’s positions in medium size oil producing companies and the oil service industry, both of which benefited substantially as oil prices rose from $0 per barrel to $60 per barrel during the year."
Performance Review 2006
Ute Speidel: "The fund underperformed benchmark as oil prices did not continue their expected rise in value despite much higher than forecast levels of oil consumption in the developing world. Oil prices actually ended the year slightly below the $61 per barrel they had started the year at. A number of companies also started to experience the effects of inflation in the supply chain, both in oil producers but also service companies but also the oil service companies, whose margin expansion was not as fast as expected."
Performance Review 2007
Chris Wheaton: "The fund benefited from its holdings in the oil services industry particularly this year, as oil prices rose consistently from $60 per barrel at the start of the year to $95 per barrel by year end. Companies exposed to the US natural gas market, where prices rose almost as much as in the oil market, also did well. Large oil companies, by contrast, continued to underperform the energy index and the fund reduced its exposure to them during the year."
Performance Review 2008
Chris Wheaton: "In 2008, the world and particularly the energy industry experienced extraordinary volatility. The oil price continued its rise from $95 at year end to its peak of $147 per barrel on 3rd July 2008, despite clear signs of reductions in economic activity from April onwards. AS these signs became clear, the fund became increasingly more conservative, increasing its weightings in major oil companies and reducing its holdings in oil service sand small and medium sized oil companies. The second half of 2008 saw the “credit crunch” and oil prices collapsing from levels that were clearly too high to just $34 per barrel in December 2008, a price which was clearly too low. Exxon was the biggest single contributor to the underperformance in 2008, because even holding 10% of the fund (the legal maximum) in Exxon still meant the fund was underweight a stock which outperformed by 40% in that time."
Performance Review 2009
Chris Wheaton: "As oil prices reached levels which were clearly too low at the end of 2008 and early 2009, the fund became much less defensive and increased its holdings in both oil service and oil exploration companies. These outperformed significantly as economies recovered from their “near-death” situation and the oil price nearly doubled in the year, from nearly $40 per barrel to $77 per barrel by year end."
Performance Review 2010
Chris Wheaton: "2010 saw oil prices decline in the first three-quarters of the year then rise sharply from September, reaching $95 by year end and $100 per barrel just after year end, the highest oil price since September 2008. The fund positioning was aggressively long of oil service companies, which were seeing the first signs of revenue recovery and margin improvement, hence the underperformance in the first half of the year but strong outperformance from September onwards."
Performance since 2005
Chris Wheaton: "Over the full period since 2005, the fund has slightly underperformed the benchmark, the main reason for this being late 2008/early 2009 when the fund did not take aggressive enough positions in companies leveraged to rising energy prices. Once this leverage to oil prices was re-established, the fund has performed well, and in line with the benchmark."
Investment Process and Strategy – How does the Fund Manager Invest?
Chris Wheaton: "The Allianz Energy Fund invests on a fundamental basis to gain access to the themes within the energy space which we find attractive. We have both long and short term themes that we establish and by way of fundamental research, we choose the best single stocks to gain the desired exposure.
We have a global energy research resource with specialist energy investors based in the US, Asia and London. Our in house economists provide up to date analysis of the macro economic backdrop globally, which allows our investment themes to be informed in this context.
The energy team invests dynamically, but has a scheduled weekly meeting in which to discuss the investment performance drivers, potential investments, validity of themes and the macro environment. This meeting also incorporates risk reviews and the compliance with investment controls."
- 2010 saw the 2nd fastest growth in oil demand ever recorded
- BRIC economies increased by 1.4Mb/d, this was even more than in 2009; China was two-thirds of this
- Other non-OECD economies grew their oil demand substantially again- concentrated in the Middle East (due to chronic power shortages), Latin America ex-Brazil and Central Asia
- Even the OECD grew its oil consumption for the first time since 2007, due to exceptionally cold weather
- 2011 is forecast to see yet another year of growth of c. +1.5Mb/d
- This growth is likely to be split along similar lines as 2010:
- BRICs will account for 50% of oil demand growth, of which China will be just over half
- Other non-OECD will be the other 50% of demand growth
- OECD oil demand will stay flat or possibly decline given the exceptional weather of 4Q10
• This pattern of c. 1.5Mb/d of annual demand growth, and all outside the OECD, will last beyond 2011
• The long-term drivers of oil demand remain strong: urbanisation, consumerisation, population growth
• The world has enough oil reserves, the issue remains the rate of production growth versus the rate of demand growth
• Oil prices will have to rise sharply to ration supplies by reducing demand in the OECD nations, but not before 2013
- Mid-sized oil & gas exploration & production companies remain attractive:
• Valuations remain attractive, particularly for those exposed to oil sands and US natural gas, and typically discount $70-75 oil. We prefer those with good track records of exploration or exploitation success, as initial successes tends to get better over time
• At $80 oil, all major oil companies are significantly cash generative and are likely to start to acquire assets because they have under-invested in exploration in 2002-2009
• Strategic acquirers of energy assets such as China, India, Korea, Japan are increasing in number and size of deal e.g. Korea buying Dana Petroleum for $3bn, China buying into Repsol’s Brazil assets for $4bn in 2010
- Oil Services companies remain attractive but valuations are high
• Valuations are close to 2007 highs already
• Consensus expectation is for capex increases by the industry in excess of those indicated so far- industry spending will likely be up +10% in 2011, and +10-15% in 2012, but not +20%
• Cost inflation has yet to accelerate, so margins will improve in this year and next, but inflationary pressures will resume next year and this will slow margin expansion
- Major oils look more attractive than in 2010 but remain low growth
• They continue to offer high dividend yields
• Only RDShell and Exxon are likely to grow faster than 1-2% per year out to 2015