At the end of September 2004, Junior Oils was launched without much fanfare. In fact, you may never have heard of it and I cannot blame you, given the volume of unit trusts in the market and the fact that a specialist fund is not going to suit everyone.
Many intermediaries shun the most specialised funds because their lack of diversification makes them highly volatile. They tend to be the best or worst performers in any year. Unfortunately, many clients tend to buy just after a particularly good spell and catch the brunt of the downside.
Despite this, I do think they have a place in more portfolios than you might expect, especially those areas that can represent a relatively long secular trend. I suspect this is the case with Junior Oils.
The trust is run by Angelos Damaskos (who, incidentally, is Jim Slater’s son-in-law). He is a firm believer in the oil super-cycle and is ever keen to quote Dick Cheney, who, when he was chairman of Halliburton, said there was a 2 per cent a year rise in global oil demand with a 3 per cent natural decline in production. He went on to say that by 2010 we would need the equivalent of six new Saudi Arabias.
Given this was said before the real emergence of India and, in particular, China – now the world’s second-biggest oil consumer – the point seems to be even stronger today. Add to this the fact that much of the world’s remaining oil reserves are in politically unstable countries, in some cases hostile to developers, and you have what appears to be an environment that should provide support for the oil price.
Over the last few years, the real money has been made in the small oil explorers rather than the giants such as BP and Shell and Junior Oils plays this theme. The fund looks to buy into small oil stocks which have the potential to climb significantly in share price and, of course, are more likely to be taken over.
It is more than a portfolio of punts. Damaskos looks to buy into solid companies which are cashgenerative, have significant reserves and where the production has not been hedged. It has a highly concentrated portfolio, with the top 10 accounting for over 50 per cent of the fund. The top stock is Egdon Resources at 8.3 per cent followed by Dragon Oil at 7 per cent and Roc Oil at 6.6 per cent. This gives you an idea of the level of concentration.
Damaskos has been an investment banker for 15 years but obviously is not yet well known as a fund manager. He worked 10 years at the European Bank for Reconstruction and Development and during his last five years there, he directed an equity portfolio of unquoted private companies, so he does have considerable investment experience.
One point that may surprise you is that the fund will not invest in the Middle East. A significant portion will be invested in bigger stocks based on their relative value and better liquidity. Much of the money will be invested in relatively small oil stocks but there will be cash available for new issues which are coming to the market.
The trust has almost doubled in price since launch. Last year was relatively slow but it still managed to rise by over 20 per cent. So far this year, it is up by around 7.5 per cent and I have a strong feeling there is more still to play for.
It is clear that the major oil companies do not have sufficient reserves, nor are they likely to discover them via exploration. The easiest way for them to increase reserves must be to buy existing small companies. Given that companies like BP and Shell throw off huge amounts of cash, they certainly have the capital available to make some significant purchases.
Junior Oils could be looked at as a hedge against further rises in oil prices within an existing portfolio. I stress that it is speculative but I believe the investment case makes a lot of sense. Very few people have bought the fund as it is still only £12m in size. I would suggest there is a place for this fund in big portfolios.
Mark Dampier is head of research at Hargreaves Lansdown.