The Liontrust Macro Equity Income fund has sold out and reduced its holdings FTSE oil stocks, a traditional safe haven for dividend investors, as oil struggles to reach the $50 threshold required for profitability.
Fund managers Stephen Bailey and Jamie Clark say the oil stocks rally following Brexit, based on their US dollar earnings, was “madness”, but took advantage to sell their stake in Shell.
They sold out over July and August with their last sale at 1,965p. The stock was selling at 1,889p the day of the referendum having rallied from 1,277.5p in January.
The fund held around 9 per cent of holdings in oil last year, but the fund managers argue a supply glut and advances in shale gas and electric cars mean the industry will struggle to return to profitability.
The fund currently only has 2 per cent exposure to oil through Royal Dutch B, however, it reduced its holding in the company as it rallied 14.2 per cent to its post-referendum peak on 14 July.
Clark says the price has since pulled back as investors shunned bond proxies and US dollar earners in favour of battered mid-caps and financials.
Regarding wider case against oil, Bailey says the current supply glut has been forecast to continue in 2017 by the IEA.
Adding to supply issues, a number of producers aren’t members of OPEC and countries such as Libya and Iraq are driven to keep producing due to being “desperate” for hard currency, Bailey says.
While shale and electric vehicle technology represents a threat to the industry, Bailey argues companies are too heavily geared to enter these industries via M&A.
Royal Dutch Shell: Falling Earnings, Uncovered Dividends and Rising Debt
At Shell, for example, dividends have remained stable as earnings per share drop and net debt per share rises.
US shale is becoming profitable at close to $50 a barrel, placing a cap on how much the price of crude oil can rise.
Electric vehicles are forecast to increase 14-fold by 2020, the fund managers pointed out.
Bailey adds investors in companies such as Shell and BP are there for dividends, not growth, in contrast to Tesla, which has “no shortage” of growth investors.