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Manager focus: John Coyle

Perhaps the most difficult thing for fund managers is to sit back and watch their stocks crash, says John Coyle, the manager of the Schroders International Selection fund (ISF) Global Energy. But that was exactly what he had to do last year.

“Between 2005 and 2008, [the fund] had performed very well. But the world changed in September last year,” Coyle says.

“The fund had the wrong structure for the market we saw last year,” he says. With 30 positions, all mid-caps, the fund is highly concentrated.

As a result, Coyle says he had only two choices. “Option one was to completely change the fund and buy large-caps. Option two was to ignore the volatility of markets and believe that it will recover when companies stabilise. And that was exactly what we did.”

He decided not to sell the mid-caps and not to buy large-caps. “The fund eventually recovered very strongly in 2009, after a very bad 2008,” he says. He says he is pleased, but given the pain suffered last year, he is not getting too excited yet.

According to the fund’s factsheet, over the 12 months to the end of March the fund was up 11.4%, while its benchmark, the MSCI World Energy index, was down 8.1% in dollar terms. “It takes time to rebuild reputation,” admits Coyle.

Coyle says not only has the fund recovered but “the world has stopped deteriorating” too. “We are very bullish on oil and gas prices in 2009. And we are therefore trying to get a higher exposure to oil and gas.”

The oil market, he says, is unique because of the Organization of the Petroleum Exporting Countries (Opec) that manages oil supply. “It is actually a strange commodity. Very different from other commodities like copper or steel.”

Coyle expects the global demand for oil this year to fall by 2% or 1.8m barrel per day. “Opec will reduce its supply by 4m barrels per day. Oil exporting countries that are not members of Opec, Russia, Britain, Norway and Mexico will also reduce their supply.” He says that combined, Opec and non-Opec countries will supply 5m barrel per day less.

“One might ask, why are oil prices not up already? This is because in September last year, there were terrible economic conditions. It took Opec about four-to-five months to respond to the crisis. Inventories increased dramatically – there were 200m barrel above average,” the fund manager says.

“However,” he adds, “with supply down by 5m and demand down by 1.8m, we should expect all inventory to disappear within 80 to 90 days. Inventories will start to fall very quickly – there will be another shortage.”

Coyle expects oil prices to reach new highs in August and September. “Oil will become much more expensive than last year. Energy markets are generally weak in April and May because demand for energy is weak. But they are high in winter because energy is needed for heating. And in summer because of air conditioning.”

Coyle is also bullish on gas. “We are keen on gas because of our outlook for oil prices. Gas prices are linked to oil prices: they will eventually follow [the upwards trend]. The number of drilling rigs that are searching for natural gas in North America, the biggest market in the world, has fallen by 60%. North America will have to buy from Asia and Europe.” He adds that this will drive prices high. “Prices for gas will rise very quickly. And we don’t have an [organisation like] Opec in the gas market.”

“But there are also areas we are just not interested in at the moment. For example, we are not keen on nuclear and renewable energy.”

He says investing in nuclear energy requires a longer term investment horizon than his investment strategy can allow for.

“We have nothing ideologically against renewable energy. But we have problems with valuations [of companies in that sector]. They are very expensive compared to oil and gas companies. We have only 30 positions in the fund and every single position has to be attractive on a stand-alone basis.”

The portfolio consists largely of traditional oil and gas-based companies. But it can also include companies involved in infrastructure, utilities, renewable and alternative energy. He says many of these companies have benefited from increasing demand, a steady stream of new orders and higher operating margins.

His decision is based on stock price appreciation potential – not on sectors or countries. His top 10 holdings are in Albania, India, Syria and Turkmenistan. “We have no problems with governments and politics. Political risk doesn’t concern us,” he says.

“In mid-2009, we will increase the risk of our portfolio quite substantially. But for now, we remain careful.”


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