With the price of oil at around $30 per barrel, managers of commodity funds are finding some good op...
With the price of oil at around $30 per barrel, managers of commodity funds are finding some good opportunities.
Graham Birch, head of natural resources sector funds at Merrill Lynch Investment Managers, expects the oil price to stay at present levels for the time being.
The decision by Saudi Arabia to increase the production levels will have some impact on the price, but they are likely to be constrained by other OPEC members, some of whom are showing signs of irritation at the move.
The big driver for oil prices going forward is likely to be global economic growth. People expect a slowdown, but the magnitude and timing remain uncertain. If it is less and later than expected, the price could actually go up.
Merrill Lynch's Energy International, an offshore fund valued at $65m, is constructed with a view to benefit from the high oil price. Some 40% of the fund is invested in integrated oil companies such as Total Fina, Shell, BP Amoco, Petrobras and Exxon Mobil. The allocation to oil field services companies, such as Transocean, is 25%.
The demand for their services will rise as companies step up their oil exploration. The fund also has a 10% allocation to associated exploration and production companies. The rest of the fund is in alternative energy companies and energy utilities.
Despite good fundamental and strong earnings growth, the oil sector remains relatively unfashionable.
Birch says: "P/Es are well below market average and look even better as companies report good earnings. But because of the sector's reputation as low growth and a bit boring, growth investors tend to ignore it."
Graham French, fund manager for the £30m M&G Commodity fund, is favouring the oil companies that are most geared to the oil price. He especially likes Total Fina, Shell, Exxon Mobil, Enron and Lasmo. In general, he believes that all commodities are in a hiatus.
He says: "Everyone is looking for an economic slowdown, but no one knows when it will happen and how big it will be."
In commodities, as in most other sectors, the game has become one of waiting for the next economic figure coming out of the US.
"The bearish are worrying about economic growth and interest rate peaks, while the bullish are focusing on company fundamentals. The question for most people is: How far do you discount a slowdown?"
The M&G Commodity fund has allocations of 16% to the oil sector, 25% to platinum and palladium, 4% to gold, 5% to agricultural produce and 5% to basic building materials. Some 40% is in the diversified sector.
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