Local
energy mutual funds Still a fruitful investment
The Trinidad Guardian
Port
Spain
Petroleumworldtt.com
01 07 07
Time
and time again local market commentators have bemoaned
the lack of locally available investment opportunities
generally but, particularly, in the energy sector
for the individual investor. This situation is particularly
exasperating considering that revenue from the petroleum
industry accounts for an estimated 45 per cent of
this country’s GDP for 2006 based on government
projections.
It
is also disheartening that investors were unable
to benefit from the buoyancy of the energy sector
and oil prices, particularly over the last five
years (See Exhibit 1).
Over
that period international energy companies were
able to report record profits. Exxon Mobil reported
this year an annual profit of US$36.13 billion,
the highest profit for any US company ever. While
in 2005, the National Gas Company of T&T Ltd
(NGC) posted its third consecutive year of profits
exceeding $1 billion. The Petroleum Company of T&T
Ltd (Petrotrin) also crossed the $1 billion profit
mark in 2005, and posted a return of 193 per cent
over the prior year.
The
acceleration in oil prices over the past five years
has been in response to growing demand from Asia
and continued instability in the Middle East, particularly
in the wake of the events of September 11 and the
onslaught of America’s war on terror and subsequent
invasions of Afghanistan and Iraq. While prices
have cooled since peaking in August, oil and the
energy sector in general remain promising investments.
The
sole company listed on the first tier of the T&T
Stock Exchange (TTSE) which contains an element
of the local energy sector is National Enterprise
Ltd (NEL). Even this listed security, however, falls
short as the company also holds majority shares
in two non-energy sector companies: National Flour
Mills (NFM) and TSTT, which skews NEL’s overall
returns and is not a true reflection of the energy
sector. The only other representative of the energy
sector on the TTSE is second tier listing Mora Ven
Holdings Ltd, which with its relatively small market
capitalisation is insufficient to supply local investors
with an investment opportunity.
In
more recent times locally owned companies have been
able to penetrate the predominantly foreign and
the Government owned and operated local energy sector.
Companies such as Neal & Massy Holdings Ltd
and Guardian Holdings Ltd (Prometheus) to name a
few have expanded beyond their traditional areas
of business into the profitable energy sector and
related downstream industries.
While
individuals may be able to purchase shares in some
of these companies, the energy related segments
of these companies are still relatively small and
do not give investors real exposure to the energy
sector which internationally traded stocks like
Exxon Mobil, Shell and BP give to international
investors.
An
entrant to the energy market the First Citizens
Bank First Energy Fund was launched on August 11,
2004. This fund is currently the only local mutual
fund to focus on investments in energy and energy-related
companies and projects. The investment policy or
intention of the fund is to invest no less than
70 per cent of the fund’s assets in these
types of investments. The fund which is US$ denominated
allows local investors to participate in the domestic,
regional and international energy sectors.
The
open-ended fund has a relatively low minimum initial
subscription of US$100 and thereafter minimum additional
subscriptions are US$20. Investment manager fees
are not to exceed an annual rate of two per cent
of the average net asset value (NAV) of the fund,
while trustee, fund administrator and distributor
fees are each not to exceed an annual rate of 0.25
per cent of the average NAV of the fund.
Since
the launch of the fund in 2004 interest in the fund
has grown and as a result the assets under management
(AUM) of the fund more than tripled to US$10.8 million
or $68 million as at September 2006.
Given
the absence of a variety of energy based type investments
the Unit Trust Corporation (UTC) is currently on
stream to launch its own energy fund. The UTC Energy
Fund, similar to the First Energy Fund will invest
in securities of companies involved in energy and
energy-related activities; locally, regionally and
internationally.
Advance
information released about the fund have noted that
the areas of investment would include oil and gas
companies, exploration companies, energy companies,
energy production companies, midstream and downstream
companies, oil service companies, energy technology
companies and alternative companies.
In
recent media reports it was noted that the soon
to be launched fund will be sold to the public for
two weeks at an issue price of US$20 per unit. It
was also revealed by the fund’s management
that there will be a sales charge of five per cent
of the offer price and a management fee of up to
1.50 per cent of the fund’s NAV.
An
important note for investors who may be interested
in energy mutual funds, or for that matter any sector
specific mutual funds, is that there is greater
risk and volatility associated with these funds
as opposed to other broader based and diversified
mutual funds. Investors in these types of funds
therefore should be those with a medium- to high-risk
tolerance. Investors may also need to have medium-
to long-term investment horizons, as energy markets
will exhibit high volatility as unpredictable factors
impact on demand and supply at different times.
Oil
prices, for instance, are affected by a multiple
of factors. On the demand side, cold weather and
increasing development and growth in burgeoning
economies such as China and India increase demand.
While on the supply side the Organization of the
Petroleum Exporting Countries (Opec), which represents
some of the largest oil producing nations in the
world, can alter prices when they make decisions
to increase or decrease oil production.
Also
negative events in oil producing regions such as
the damage caused by Hurricane Katrina in the Gulf
of Mexico, political and social unrest in Nigeria
and the Middle East cause concerns over the safety
of supply and typically cause prices to rise.
The
International Energy Outlook 2006 (IEO 2006), from
the Energy Information Administration had projected
that there will be continued growth in world energy
use. The IEO 2006 also estimates that current energy
resources are adequate to support growth up to 2030.
Analyst
consensus is that oil prices will remain high, as
demand continues to grow and reserves shrink.
Energy
mutual funds, therefore, while riskier than non-sector
specific mutual funds, are expected to continue
to trend upwards over the long term as demand outstrips
supply. It should be noted that energy and energy-related
investments are not solely limited to petroleum
and petroleum products. There are other types of
energy sources, though perhaps none as popularly
used as petroleum and other fossil based fuels.
Given the finite nature of fossil-based fuels, the
energy industry is actively developing other sources
of energy such as environmentally friendly and renewable
“green energy” such as hydroelectric,
wind, solar and bio-fuel such as ethanol which has
increased the demand for corn and sugarcane. The
inclusion of these type of investments may add some
diversification to an energy portfolio, however,
not necessarily reduce risk as these technologies
are somewhat still in the infancy stages.
On
a last note to investors interested in going the
route of energy mutual funds, be sure of your time
horizon. Although all indications point to continued
growth in demand for energy, the market is not immune
to short- to medium-term blips and a global slow
down or recession could have the effect of decreasing
demand and returns from energy investments.
Also,
very importantly, an investor should consider exposure
to energy mutual funds as part of an overall diversified
portfolio of investments. As always novice investors
are recommended to consult a registered financial
adviser to develop an individual investor profile
and gain pertinent advice on an efficient mix of
investments.
This
report is for informational purposes only and does
not constitute an offer or solicitation to buy or
sell any mutual funds or securities discussed herein.
The information and any data contained herein have
been obtained from financial data provided to us
by the issuers of the subject mutual funds or securities.
Investors wishing to purchase any of the mutual
funds or securities mentioned should consult an
investment adviser. Projections and estimates are
those of Bourse Securities based on current available
information.
E-mail
us at admin@boursefinancial.com or phone 623-0415/0416
/9360
The
Trinidad Guardian
Thursday 21st December 2006
Copyright©2005-2006
Trinidad Publishing Company Limited.
All Rights Reserved.
