Angelos Damaskos, the manager of the CF Junior Oils trust, has moved most of his cash into corporate bonds over the past couple of months, but has been considering liquidating part or all of it to buy equities.
Expecting volatility in both the oil price and equity markets, Damaskos positioned his trust defensively earlier this year. Apart from having a large weighting in cash and bonds, he also leaned towards companies with large cash reserves and growing production.
This strategy, he says, has provided a cushion against weak share prices. Despite challenging market conditions, Damaskos says he reduced the volatility of the fund and preserved its value.
In January, he held as much as 29% of its portfolio in cash, until he decided to allocate to corporate bonds. The bonds grew to about 12.5% of the portfolio by March. Its holding in cash fell to 15%, but later grew to 18% as new investors came in.
Damaskos has recently been reinvesting a large proportion of this cash back into the market as he sees undervalued opportunities, especially “in the context of weak equity markets”.
When his cash reserves are fully deployed, Damaskos may liquidate part, or all, of the bond portfolio, should he still see compelling investment opportunities in stockmarkets.
“We have taken advantage of recent market weakness to build positions in undervalued situations, and intend to continue to mobilise the fund’s cash reserves as compelling opportunities emerge,” he says.
One new addition to the portfolio is Cooper Energy, an oil and gas exploration and production company. The market briefly valued it at just above its cash reserves, which made it an attractive buy.
Damaskos says April and May have been “very difficult” times for commodity investors. Concerns over a slow down in the Chinese economy, rising inflation and the possible withdrawal of monetary stimuli programmes had caused base metal prices to drop.
Earlier this month, he adds, an increase in the margin requirements on silver and oil trading derivatives caused the largest drop in prices of those two commodities in one day since the financial crisis in 2008.
“Oil prices have declined as speculative traders changed their positions, but remain supported by the geo-political unrest in North Africa and the Middle-East,” he says.
“We expect increased volatility through the summer, with some stability in the last quarter of the year assuming geo-political tensions ease.”
Damaskos avoids the “politically unstable” Middle East and North Africa region. He considers Russia as “too risky” and is therefore avoiding the country altogether, even though it would be one of the biggest beneficiaries should the oil price rise further. Instead, he has put money into Norway, a rival oil producer.