As the price of oil has collapsed over the past few months, plenty of bargains have emerged within the oil and gas sector.
However, unless you’ve got a huge chunk of cash to invest across the sector, it’s difficult to separate the wheat from the chaff and pick those companies that have the best chance of riding out the current market weakness. There are plenty of companies out there that will struggle to survive in the current environment.
As usual, the best way to minimise risk in this case is to invest across the sector. Funds are usually the most cost effective and efficient way of achieving this diversification.
A risky pick
Right at the top of the pile — and the most risky play — is MFM Junior Oils Trust. The fund only has £22m in assets under management, so it’s one of the smallest trusts out there and its portfolio is full of high-risk, high-reward plays on the oil industry. MFM’s largest holding is FAR Limited, an Australian explorer with a portfolio of exploration licences across Africa.
However, the Junior Oils trust has a poor performance record. Over the past five years the trust has returned -25% excluding fees. The total expense ratio is 1.88% per annum and the trust offers no dividend.
Global diversification
A larger, more diversified play on the sector is the BlackRock Commodities Income Investment Trust. With assets under management of £104m, the income investment trust is four times the size of the Junior Oils trust and supports a 5.9% dividend yield at present. The top three holdings, which make up 18.6% of the portfolio, are two oil majors, Chevron and ExxonMobil, and the world’s largest miner, BHP Billiton.
Moving up in size, with £151m of assets under management, Investec Global Energy offers an alternative play on the energy sector. Global Energy’s largest holding is Suncor Energy, a Canadian oil sands producer, which accounts for 5% of the fund. A dividend yield of 0.46% is offered and the total expense ratio is 1.62% per annum.
With just under half-a-billion pounds in assets under management, First State Global Resources is the second largest fund I’m looking at, and is more orientated towards non-oil commodities. The fund’s top three holdings, accounting for 26% of assets under management, are BHP, Rio Tinto and ExxonMobil. The total annual expense ratio is 1.54% and a dividend yield of 0.53% is offered.
And finally, a fund that may not be accessible to all investor,s but is still appealing nonetheless. The BlackRock Global Funds World Energy fund is an offshore fund, which requires a minimum initial investment of £5,000. The fund has just under £1.3bn in assets under management. Around 30% of these assets are invested in oil majors Chevron, Royal Dutch Shell and Exxon.
