Altamira Investment Services Inc. and Goodman & Co. are launching energy funds, two products coming to market when oil prices are becoming volatile.
"One-third of the world's population is emerging from a less industrialized to a more industrialized economy and they are going to need more energy," said Ian Dillon, Altamira's chief investment strategist.
The Altamira Energy Fund, available since Nov. 1, plans to hold 60 per cent of its assets in oil and gas companies, 20 per cent in energy-related industries such as pipelines and utilities, and the remainder of the portfolio in alternative energy companies. The fund has an annual management fee or management expense ratio (MER) of 2.6 per cent.
Goodman's diversiTrust Energy Income Fund, meanwhile, will hold up to 100 per cent of assets in energy trusts and has the option of holding up to 30 per cent of assets in energy company shares. Each $10 unit of the closed-end trust is expected to yield 10 per cent annually, notes the trust's Nov. 2 prospectus. The trust, with a 1.1-per-cent MER, should be available later this month.
The two products are competing for attention in a small but growing field. According to ratings of the Canadian Investment Funds Standards Committee, there are 10 natural resource funds focused exclusively on the energy sector with an average MER of 2.2 per cent.
In addition, there are 14 income trust funds with a 30-per-cent or higher asset weighting in energy trusts and an average MER of 2.2 per cent. Three trusts -- Dynamic Focus Plus Energy Income Trust, Middlefield Index Income Class and Acuity Income Trust -- have greater than 50 per cent of their assets in energy.
Energy and oil products have become "the flavour of the month," said Daniel Chornous, chief investment officer at RBC Asset Management Inc. The Royal Bank of Canada's mutual fund arm manages the $291-million RBC Energy Fund, the country's oldest and largest energy-specific sector fund.
The new funds are "playing on the popularity of the energy sector," said Dan Hallett, president of Dan Hallett & Associates Inc., a mutual fund research firm. He added, however, that it would be "unfair" to characterize Altamira and Goodman jumping on the bandwagon given their long history of investing in the oil patch.
The two funds are chasing investment dollars at a time when enthusiasm for oil appear to be on the wane. In October, crude oil futures surged to $55 (U.S.) a barrel. Prices dipped below $48 this week as hedge funds unwound speculative positions and snapped up equities. Last Tuesday, the International Energy Agency said prices are still too high and should continue to fall.
Within the next few months, "I expect a pullback in the price of oil to $30 to $35 per barrel," said Victor Vallance, energy analyst at Fraser Mackenzie Ltd. in Toronto, adding that oil and gas equities may retreat as much as 20 per cent in value, too.
Recent trading history indicates that energy is a good bet in a weak equity market but lags in performance when stocks are strong. Over the past five years, the Standard & Poor's TSX energy index has returned an impressive 158 per cent, outperforming the S&P/TSX 300 index's 33 per cent during the same period. But in the bull market of 1995 to 2000, the energy group was up 49 per cent while the broader equity index rose 130 per cent.
Oil's dramatic 40-per-cent price gain this year has meant a mini-boom for energy funds. For example, the assets under management in Barclays Global Investors Canada's iUnits S&P/TSX capped energy index fund have doubled this year to $192-million.
"You get all the upside and all the downside and you get it in a diversified way across the entire sector," said Gerry Rocchi, president and chief executive officer of Barclays Global in Toronto.
Low annual management fees have made Barclay's string of exchange-traded funds a popular destination. The Energy Index Fund boasts an MER of 0.55 per cent, about 1.5 percentage points lower than the average fee. That said, an investor also gets the risk of some fully valued equities in the Barclay's fund.
Calgary's buoyant EnCana Corp. makes up a heady 17 per cent of the S&P/TSX energy index and the iUnits-linked fund. One industry source said the weighting was reminiscent of Nortel Networks Corp.'s glory days in 2000 when the telecommunications company made up about 30 per cent of the value of the old TSX 300.
Energy fund managers are using a number of strategies to mitigate risk. Sentry Select Capital Corp.'s Sentry Canadian Energy Growth Fund has a 25-per-cent asset weighting in junior oil and gas equities, stocks likely to have strong upside when new reserves are discovered or production escalates.
"We feel it is a lot easier to grow from 1,000 barrels a day and double your production than it is from 50,000 barrels a day and double your production. Having a large and diversified exposure to the right juniors will give us the best capital appreciation for the least amount of risks," said Glenn MacNeill, Sentry's vice-president of investments.
TD Asset Management Inc.'s TD Energy Fund, meanwhile, watches valuations closely, unloading pricey stocks and bulking up on cheaper equities when necessary.
"We consciously cycle in to lower-valuation stocks, which show us more upside," said Ari Levy, co-manager of TD Energy. "If a company hits our target price, we're not shy . . . about taking some money off the table and putting it to work elsewhere."
The short-term outlook for energy funds is good. Strong demand, especially from China, a dearth of new discoveries and geopolitical uncertainty is expected to keep oil trading at a lucrative $30 a barrel or better through 2005 and 2006, many analysts agree.
Nevertheless, the fund community continues to preach the merits of diversity, and volatile niche funds make many nervous. Energy funds are not for the faint of heart and odds are most investors have a healthy exposure already via a diversified equity portfolio, notes Mr. Chornous of RBC. Energy stocks currently make up 18 per cent of the S&P/TSX composite index.
"What concerns me about these sector funds is they should not be the first stop for the investor. By definition, you are getting diversity within that sector but not across the economy," he said.
© 2007 The Globe and Mail. All rights reserved.
Only GlobeinvestorGOLD combines the strength of powerful investing tools with the insight of The Globe and Mail.
Discover a wealth of investment information and and exclusive features.