Energy
funds provide new investment opportunity
Trinidad Guardian
Pirt Spain
Petroleumworldtt.com
07 08 07
Locally,
the energy sector has been the backbone of the
T&T economy. With about 42 per cent
of the gross domestic product (GDP) being derived
from the energy sector, one would assume that there
should be some kind of direct access for investors
via the local stock market or mutual funds. However,
this is quite opposite from reality, with the number
of investment avenues presented to the local investor,
as a gateway to tap into the energy sector being
quite limited.
The only access that is available to the energy
sector or energy sub sector through the local stock
market is shares of National Enterprise Ltd (NEL)
which combines the performance of the energy sector
companies such as Tringen and NGC-LNG, with the
non energy sector companies such as National Flour
Mills and TSTT.
Mora Ven Holding Ltd, which is traded on the TTSE
Second Tier Market, is another company which can
provide access to this sector, but with its relatively
small market capitalisation it is insufficient
to supply local investors with an investment opportunity.
As for mutual funds until recently the First Citizen
Bank First Energy Fund was the only other mutual
fund available locally to investors. The fund which
is a US$ denominated fund gives local investors
the opportunity to participate in the domestic,
regional and international energy sectors.
New gateway to energy
The Unit Trust Corporation is the latest entrant
into the market with the launch of the UTC Energy
Fund.
The fund is an open ended US dollar-denominated
mutual fund which invests in securities of companies
that are principally engaged in the energy and
energy related activities locally, regionally and
internationally.
According to the prospectus the fund can invest
up to 70 per cent of its assets in the common stocks
of companies principally engaged in energy related
activities, such as production and transmission
of energy or energy fuels; alternative energy;
energy research; and energy conservation or pollution
control; energy servicing; energy midstream and
downstream activities.
With an initial purchase minimum of US$100 and
subsequent purchases of US$20, the fund is accessible
to most investors.
There is a front load or a sales charge attached
to this fund of five per cent. This charge is deducted
(up front) before funds are invested.
For example, if an investor were to buy US$1,000
worth of units, US$50 would be taken out for the
sales charge while US$950 would be invested into
the fund. Some investors may consider this to be
an unattractive feature of the fund. Other fees
include management fees up to 1.5 per cent of the
fund and administrative fees which can reach up
to 0.5 per cent.
The
UTC will act as investment adviser to the fund
with responsibility for managing the fund’s
investments and trading activities.
The lack of international specialist advisors
for the fund may be of concern for the local investors.
However, representatives of the fund have indicated
the availability of international advisers services
as and when required.
Another area of concern for investors is, due
to the nature of the industry, the fund is considered
to be medium- to high-risk due to the sector specific
investments.
In addition, the energy sector is also very volatile
which can cause the assets of the fund to fluctuate
by a wide range depending on a number of external
factors. Oil is a good example of this volatility
as seen by the graph in Figure 1.
Fossil fuels
Fossil fuels such as oil and coal continue to
be the dominant source of energy and likewise are
a large component of the energy sector. This makes
diversification difficult for energy specific funds.
On the positive side the demand for these commodities
will grow as countries such as India and China
develop.
As demand continues to grow, while reserves shrink,
the price of fossil fuels will increase. Coupled
together with the possibility of natural disasters
such as hurricanes and geopolitical pressures such
as the war in the Middle East and the social unrest
in Nigeria the price of fossil fuels and, in particular,
oil can be extremely volatile.
Analysts have forecasted that the price of crude
oil will rise in 2007 and 2008.
Alternative forms of energy
The price of oil has reached record price levels
within the last year. The effect of these high
oil prices can cause adverse economic implications
on oil dependent countries.
Therefore in a bid to move away from its dependence
on oil, countries such as USA and Brazil have began
making inroads into the research and development
of other energy sources such as hydroelectric,
wind, solar energy and bio-fuels such as ethanol
and methane.
Currently in Brazil biofuels are being used in
cars while countries such as USA have began introducing
tax incentives to consumers that are willing to
buy fuel efficient hybrid vehicles.
In addition to the increasing price of fossil
fuels there has been the growing concern for the
environment. Consumers have began to become more
aware of the destruction to the environment caused
by unnecessary waste and, as a result, have began
to support companies involved in energy conversation
via methods such as recycling.
Although alternative energy companies accounts
for a small fraction of the energy sector there
is the room and prospect for growth.
Welcome
UTC Energy Fund is a welcome addition to the limited
number of investments in the energy sector. The
fund may be a good fund for long-term investors
looking for an avenue to diversify into the energy
sector. However, the energy sector is very volatile
and, as a result, the fund is intended for investors
with a medium- to high-risk tolerance that are
willing to accept price fluctuations.
In order to determine if this fund is for you,
it is recommended that you seek the advice of your
financial adviser and determine if the funds fits
into your investment goals and objectives.
Send questions or comments to:
askus@boursefinancial.com. Or e-mail us at
admin@boursefinancial.com;
phone 623-0415/0416 /9360
Trinidad Guardian
Thursday 5th July, 2007
Copyright
©2007 Trinidad Publishing Company Limited
. All Rights Reserved.
