RWC Partners’ fund manager Louise Keeling has warned investors of the “abundant supply” of energy arguing OPEC’s production cut won’t be enough to level out and balance reserves.
Speaking to Fund Strategy, Keeling says the high level of investment in the energy sector has been driven by “a smoothed commodity price” which in turns leads to poorer returns to investors.
She says: “Our process is focused on the capital cycle and alignment of interests between managers and owners of businesses. The capital cycle or supply side focus alerted us to the flood of capital that has entered the energy sector in recent years. This resulted in significant new reserves being identified around the globe. We believe that the period of high investment is still being digested.
Keeling adds: “More generally, we believe the energy sector is often guilty of over investing at the top of the cycle and under investing at the bottom of the cycle as they base their investment decisions on a smoothed commodity price. This investment approach results in poor capital allocation and shareholders receiving lower returns on their capital through the cycle.”
The manager of the RWC Global Horizon fund is instead focused on financials, mainly American, which were the top contributors to performance over the fourth quarter of 2016.
The top five contributors were US bank Huntington Bancshares, the largest financial position in the portfolio at 3.3 per cent, asset manager Lazard at 2.55 per cent, online broker TD Ameritrade at 2.10 per cent and CaixaBank and Synchrony Financial at 1.85 and 1.59 per cent respectively.
In November, the $124.5m fund has passed its three-year track record with a return of almost 19 per cent versus 12 per cent of the MSCI AC Net World TR Index as of the end of December, according to Lipper. Over the last three months, it has returned 6.14 per cent compared to the index’s 7.86 per cent.
The fund is a “pure” bottom-up fund, agnostic to the geographic base of companies, and with a high active share of nearly 95 per cent and a turnover of 14 per cent.
Despite the high allocation to financial services stocks, Keeling’s top holding remains Amazon (7.35 per cent) which has been in the fund since its inception.
Keeling agrees on the potential of the firm to officially turn to financial services, despite challenging regulatory pressures in the sector.
Keeling says: “Amazon is a highly disciplined investor, focusing on areas where it can provide a differentiated product or service, where they have the ability to invest small before committing large sums to a project and a focus on free cash flow which runs throughout the organisation. So, if financial services fulfilled these criteria then I think it is possible Amazon would move from selling on third party services to creating their own.
She adds: “From a competency perspective, their expertise in managing and analysing data including consumer behaviours and payment processing would make them a valid competitor. The big issue is whether they want to be subjected to the level of regulatory scrutiny that comes with being a financial services provider. Furthermore, when you look at their Web Services business maybe they are running banks already?”