In the slick of it
The oil crisis has put pressure on pension trustees to rethink the place of BP and other such companies in their portfolios Annie Shaw reports
As BP skipped its dividend last month in the wake of the oil spill in the Gulf of Mexico, the reality struck home of how the environmental catastrophe was going to hit the pockets of investors as well as those of the oil giant.
Advisers have been taking calls from clients worried about their investments and wondering whether now is the time to dump BP, which has been a core element of many portfolios, particularly of those who need income in retirement.
The BP share price, which hit a year high of 658p in mid-April, has fallen to around 330p, a fall in market value of between 40 and 50 per cent.
The first-quarter dividend of about 9.5p per share, which was due to be paid on June 21 and would have cost the company about $2.6bn (£1.74bn), has been scrapped and $20bn (£13.5bn) has been paid into a compen-sation fund.
Repercussions of the disaster are echoing around the globe. BP’s own research says the oil giant accounts for 8 per cent of UK pension fund income, giving greatest concern to anyone invested in an FTSE 100 UK equities tracker fund.
Overseas, US state pensions are estimated to have fallen by $1.4bn as a result of exposure to BP, with those affected including the giant California Public Employees’ Retirement System - Calpers - which has lost $284.6m. According to Bloomberg, Calpers held 58.2 million shares of BP before the disaster broke and by the middle of June had seen the value of its holding fall to $301m from $585.7m. Pension Corporation partner Amarendra Swarup, who is also the co-founder of the website Pensionomics.com, says there is pressure on trustees to rethink the place of BP and other such companies in their portfolio. He says: “Many have already taken a bath on the equity valuation, as we already highlighted, which may well be crystallised now as some look to exit positions as a response to perceived regulatory, political and reputational risks.
’Events like the Gulf of Mexico spill can have a dramatic effect on a company’s share price and highlights the importance of a diverse portfolio’
“However, it’s hard to see where they can go to get a replacement for the vital cash-flow that the dividends from BP provided. Nearly half of UK dividends in 2009 came from five companies - BP, Shell, HSBC, Vodafone and GlaxoSmithKline. One has now deferred its dividend and ano-ther is looking less attractive as it plays in the same space.
“The inevitable result then is an increasing concentration of pension fund risk in an ever smaller handful of high dividend stocks. That does not fill one with confidence.”
Suddenly it seems that the hitherto “safe” strategy of investing in Britain’s biggest and most successful companies is starting to look highly risky.
FairPensions director of campaigns Duncan Exley says: “The implications that withholding of the dividend will have for UK pension funds highlights the potential for this crisis to damage UK savings and the need for investors to put in place measures to guard against such risks in the future.”
Investors in Sipps and drawdown who are managing their own portfolios could be faced with some tough decisions about protecting their retirement income.
Other pensions experts have, however, been quick to allay investors’ fears and put the BP issue in perspective and also to emphasise the benefits of adequate diversification.
Hargreaves Lansdown pensions analyst Laith Khalaf says: “It’s important to keep some perspective. For instance, losing 40 per cent of 8 per cent of your portfolio would currently leave you sitting on an approximate 3 per cent loss as a result of the drop in BP’s price. While this is not insignificant, over the long term, you would expect your fund to recover such a loss.
“Individual events like the Gulf of Mexico oil spill can have a dramatic effect on a single company’s share price. This highlights the importance of having a diverse portfolio.”
Bestinvest senior investment adviser Adrian Lowcock says: “For those with well diversified portfolios, we estimate the total exposure to BP will be 0.6-1.2 per cent - not great but not disastrous either.”
Last October, Invesco Perpetual head of investments Neil Woodford sold his stake in both BP and Royal Dutch Shell because of fears that they would have to cut their dividends this year. Now he is on record as saying that it would be “reckless to assume $20bn is all BP has to worry about”. “BP’s growth aspirations will have to be significantly reined back and it may be a much sma-ller business in future,” he says.
Dr Swarup says the deci-sion by BP to defer dividends for the next three quarters and set up a $20bn escrow account will reduce its attractiveness as an equity holding for many pension funds.