The energy sector’s collapse over the past 18 months dealt a blow to many investors and one of the hardest hit was GAM’s Roberto Cominotto, who has slipped from Citywire AAA-rated to zero over the past three years.
While the majority of energy experts faced a tough time, Cominotto’s performance plummeted and the Zurich-based investor has failed to retain his formerly strong risk-adjusted returns and now reflects on a series of short-comings.
‘We have seen one of the most difficult phases the energy sector has gone through, with the oil price diving from more than $100 down to $27,’ says Cominotto, who believes his field of play was engulfed by a ‘perfect storm’.
‘In the last couple of years we have had a difficult environment for a range of sectors related to commodities, global growth and cyclicals.
‘The euro crisis erupted a couple of years back, while investors were also worried about a hard landing in China, which had implications for resources. Then we had a strong dollar which was more of a headwind for the sector, capped off by the tumbling oil price.’
The Julius Baer EF Energy fund, which Cominotto has run since its launch in late 2008, lost 20.5% in the three years to the end of May 2016. While not hugely out of step with his average peer, this compares with a rise of 25.6% by the fund’s Citywire-assigned benchmark, the FTSE ET50 TR, over the same period.
On a five-year basis, the fund lost 34%, versus a 9% rise from the index.
Cominotto is suitably hard on himself. ‘Most of us investors were complacent and projected that oil prices would stay around $100 for a very long time. It turned out that more than $100 was over the top and producers were investing too much as well.
‘Like most of the industry, I underestimated this effect. Oil is still a commodity, so when prices go too high, there will be too much supply. I could have been more cautious.’
Nowhere to turn
Cominotto has been hit hard over three years...
Having held about 75% of the fund in oil, gas and industrials in mid-2013, Cominotto was exposed to extreme changes in pricing.
‘There were not many places to hide because when oil prices were in free-fall, investors put everything which had something to do with energy into the same basket,’ he says.
Even an aggressive move into more solar cell and module producers in mid-2013, to diversify into alternative energy, couldn’t shelter him from the headwinds faced by more traditional industries.
‘We had quite a large exposure to renewables and shale where we expected more resilience. It looked like the big shale companies would be largely unaffected by falling oil revenues, but their prices sometimes corrected even more than direct oil and gas companies.
‘It is difficult to say why renewables followed suit because, historically, they have had a fairly low correlation to oil prices. When the price started to collapse, the correlation increased significantly and it stayed very high until recently. Perhaps it was more of a psychological thing,’ he says.
By staying fully invested throughout the difficulties, Cominotto had to weather the storm. This meant enduring OPEC’s decision not to curb supply at its December 2014 meeting – something his counterpart at Guinness AM, Jonathan Waghorn, described as the ‘worst possible move’. This dealt yet another blow for oil and any energy stocks linked to it.
Cominotto did shift away from larger operators and focused more on value chain stocks, but the catch-all nature of the slump again caught up with him. ‘We had been diversified a bit more into energy-related industrials and some utilities but it was not enough to really decouple from the sector’s performance,’ he says.
Cominotto was also keen not to over-react and veer too far from his strategy. While the strategy was rechristened the Energy fund rather than the Energy Transition in February this year – to reduce misinterpretations of it being a renewables fund – he vowed to not change his investment approach as he believed the market was set for another shift.
‘Over the course of 2015, there was a lot of talk about energy or oil prices being lower for longer, but I am not sure about that view. When prices went below $30, that was unsustainable because at those levels the whole industry is uneconomic and nobody is willing to invest in new resources.
‘Oil prices will have to go back to levels where producers are incentivised to invest again.’
Oil to heat up
...and five year figures are equally eye-watering
Recently Cominotto added to his oil, gas and consumable fuels allocation, and although these stocks are down from the 51% level they accounted for at the start of the year, they still represent 39.5% of the fund.
‘We have substantially increased our weighting in oil & gas, directly-related sectors and industries, because of this constructive view on oil and gas prices,’ he says.
‘I think it will fall back into place, although the recovery will be much more gradual. The recent $20 rebound is not going to be repeated in the next couple of months.'
'But I do think that by 2017 conventional oil production outside the US will start to feel the impact of the investment cuts from the last two or three years. Once the market is in a supply deficit that will trigger significantly higher oil prices.’
In order to capture further gains, Cominotto has focused his attentions on oil and gas producers with North American bases, which have shown a willingness to cut capital expenditure and an ability to grow.
‘These low-cost producers, especially those with relatively strong balance sheets, have been able to exploit this crisis by acquiring assets from distressed competitors. I am convinced that the North American shale industry, particularly the high quality companies, will come out stronger than before.’
Cominotto names Canadian firms Whitecap Resources and Advantage Oil & Gas, as well as Diamondback Energy and Gulfport in the US, as key holdings. ‘We have been adding positions here over last year, although we were a bit too early on some of them.’
When quizzed more closely on the fund’s name change, which has also seen Evelyne Plufgi added as a co-manager, Cominotto echoes comments he made to Citywire when he was interviewed for Euro Stars in December 2011.
‘We think energy funds, over time, will converge to a similar strategy, because they are changing rapidly. It is not simply the change from fossil fuels to renewable energy but also within the conventional energy market itself,’ he says.
‘Shale is becoming more important, while coal is almost a stranded asset in some markets. Meanwhile, conventional oil and gas is becoming more expensive in some areas, geography is losing importance and natural gas is gaining market share.
‘Renewables are becoming a mainstream energy source and that is why we chose this strategy from the beginning and why we continue to pursue it despite the market.’
With Cominotto looking firmly to the longer-term, Citywire Selector will be watching closely to see how the energy expert fares three years down the line.
This article originally appeared in the July/August edition of Citywire Selector magazine.