How to play rising oil prices

Joanna Faith asks top multi-managers for tips to benefit from the recent surge in global oil prices.

Rising oil prices have been dominating headlines thanks to the continued unrest in the crude-rich MENA region and concerns over the Japan nuclear crisis.

At the time of writing prices had jumped to $113.64 a barrel, after hitting a session high of $114.20.

While higher oil prices could derail global economic recovery because consumers will have less discretionary income available, investors can take advantage of the theme via a number of methods.

Playing the oil price directly is notoriously difficult. David Coombs, head of multi-asset investments at Rathbones, says energy funds, which provide a relatively pure way of accessing oil, are the obvious alternative.

Investors can access oil or more commonly energy through an equity fund, where the manager will invest in companies that are beneficiaries of a rising oil price – the oil majors but also smaller companies focusing on exploration and production.

Mark Harries, head of multi-manager at SWIP, recommends the Investec Global Energy and Guinness Global Energy funds.

The £320m Investec vehicle is run by sector stalwarts Jonathan Waghorn and Mark Lacey, who were previously on the sell-side at Goldman Sachs and have vast experience in the oil and gas space.

The fund invests in companies around the globe involved in the exploration, production or distribution of oil, gas and other energy sources or companies which service the energy industry.

Head of the multi-manager desk at Smith & Williamson, James Burns, also rates the Investec proposition. He says the managers are highly regarded, having presented their industry thoughts to OPEC and various major oil companies.

“Their research is hugely detailed and proprietary. They drill down to individual project level to build company models to determine earnings and valuations of each company,” he says.

A balance between oil and gas

The £166m Guinness offering, managed by Tim Guinness, focuses on oil and natural gas and is reasonably balanced between the two at present with a spread of integrated, exploration and production and some service companies exposure.
However, John Ventre, portfolio manager for Skandia Investment Group, says investors should be cautious of energy sector funds.

“Equities price the future not the present,” he says. “Oil equities tend to outperform when the market believes increases in the oil price are sustainable. The price of most oil stocks implies a crude oil price much lower than the current price, so investors could easily be disappointed by the performance of energy stocks if there is a sharp short term oil spike.”

He also notes equities can be driven by other factors. There is a risk the equity market takes fright from a high oil price and Middle East tensions meaning that although energy equities outperform, investors may be disappointed in their absolute performance.

Ventre believes direct commodity funds are the best way of playing a rising oil price.

He says the correlation between these funds and the oil price is very high, mainly because the funds typically have 30%-40% exposure directly to energy prices, but also because the correlation between the oil price and the sugar price and the corn price is high.