eer for Shell’s Dutch operations in the North Sea before moving into research - giving the managers a good idea of what makes the industry tick.
Since taking on the fund, the pair have made a number of changes. Whilst Guinness ran an equally weighted 30 stock portfolio, Lacey and Waghorn run a more conviction driven approach: They expect to hold 30-40 names, but had 51% of assets in the fund's top 10 at 30 Sept. The managers also exclude any stocks with under $1bn market caps in order to increase liquidity, and have sold some of their predecessor's smaller names. The managers have largely recreated the screens and stock models they used at Goldman. They run a disciplined, in-depth process: First they model key commodity prices and capital expenditure (capex) figures 24 months forward. They then use this to drive individual company models accounting for the fundamentals of each firm.
The resulting portfolio has a clear large-cap bias. However, it is not conservative. Indeed, Waghorn and Lacey are optimistic for continued capex expansion despite the recent downturn, and are thus overweight their MSCI World Energy benchmark in oil services and equipment, with roughly 21% in the subsector at 30 September, compared to 13.8% for the index. That industry group tends to be volatile and this has been reflected in the funds' performance thus far, as it has been notably more volatile than its average peer and the benchmark under the new team.
Lacey and Waghorn haven't been here long enough to evaluate their performance, but we believe many factors argue in this fund's favour. First, after meeting both managers we are impressed with their level of knowledge and the strength of their process, and their experiences from the dark days of $10 oil to the heady heights of $147 oil stand them in good stead. They also have the backing of a firm we think highly of in Investec. Finally, the fund carries an attractive TER compared to its rivals which should give it an edge through time. We believe the fund remains a strong longer-term choice for energy investors who understand the sector's risks.
