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Junior league major


Angelos Damaskos started working in energy financing in the 1980s and set up Sector Investment Managers in 2004, based on his belief in a com-modities super-cycle.

His flagship junior oils trust has won supporters over its five-and-a-half years, typically outperforming its benchmark and the oil price by avoiding the integrated majors. Instead, Damaskos focuses on small and mid-cap upstream exploration and production companies as these have operational leverage to rising commodity prices.

“Some of the integrated majors have up to half their assets in infrastructure, storage and transportation, which are all subject to different business factors than oil prices,” he says. “This means smaller E&P firms will typically outperform bigger ones in a major bull cycle for oil.”

Damaskos also launched a junior mining fund last year, focusing on goldmining stocks. He feels the current debt issues in many Western countries increase the threat of inflation, with gold usually a strong store of value – and alternative to major currencies – in such periods.

The fund manager’s belief in the commodity super-cycle is grounded in the mass industrialisation of several giant Asian countries following the breakdown of communism last century.

With around three billion people across China, India and Russia alone, he highlights massive demand for energy and basic materials as these countries continue to develop their manufacturing base.

“This effect is similar in scale to the huge industrialisation of America at the start of the last century,” says Damaskos.

“Another key factor in surging commodity prices has been constrained supply, with few major finds in the 1980s and ’90s and explor-ation at a low point. Huge demand together with restricted supply saw prices on an upward path until the middle of 2008, with oil reaching $147 a barrel.”

As the financial crisis hit, this price plummeted to $33 by January 2009 although it is now back near $80 and Damaskos sees the overall trend as still firmly upwards.

On junior oils, the basic strategy is to limit risk by avoiding factors the team cannot control, steering clear of the political risks associated with Russia, for example.

Damaskos also tends not to invest in companies at the earliest stages of exploration, preferring those that have found reserves and are either already producing oil or moving towards that stage.

“We want pure exposure to rising oil prices and try to isolate any other risks in the market, which helped our performance in a difficult 2008,” he says.

This also means staying away from the integrated oil giants – largely to avoid their major exposure to non-energy risks – and the biggest holding in junior oils is Tullow Oil.

Damaskos shifted into convertible debt issues from energy stocks in 2008 to reduce risk, moving back into equities as conditions improved the following year. More recently, he has been looking to move into the better capitalised mid-caps, expecting a volatile 2010 as Governments wrestle with sovereign debt issues.

Damaskos says: “In the short term, we are expecting the oil price to remain in the $65-$85 range, with supply and demand more balanced than they have been as Asia looks to prevent any overheating.

“The industrialisation of these countries is far from over but China and India have moved to slow manufacturing down in recent months and much higher commodity prices are unlikely until the world is in a stronger recovery phase and Asian demand increases again.”

Supply remains relatively constrained, despite recent major oil finds – off the coast of Brazil and the Canadian Tar Sands, for example.

Extraction costs on these are considerable and no production is expected for several years.

Such projects are also only viable when the price per barrel is higher, with Canadian reserves mixed with sand, for instance, as opposed to the light crude of other finds.

This leaves Opec as the only body with the capacity to increase supply in the immediate future and events in 2006-08 showed the cartel unable to keep a lid on soaring prices as demand surged.

Damaskos says: “Commodity prices are more volatile at present but if you believe they will remain at or above current levels for the medium and even long term, owning well-capitalised companies involved in this part of the market is an intelligent way to invest.”


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