Recently I have had many questions surrounding the issue of investing into energy stocks. After doing a little research, I found myself talking to one of the managers with one a great track record in the industry.
Robert Lyon manages the CI Global Energy Fund. According to Lyon, “We think this fund is unique in that it is a global fund that does not restrict investments to just Canada. In fact, only 25% of our fund is invested in Canadian companies.”
Logically, this makes a lot of sense. Why limit yourself geographically when you are already limiting yourself to one sector of the economy.
Lyons likes to have fewer limitations on the fund because fewer limitations equal flexibility and opportunity.
Growth At a Reasonable Price (GARP) with the emphasis on price
If Lyon had to categorize his management philosophy or style, he would reluctantly consider himself a GARP manager. He adds, “Energy is not a growth business. Because it is cyclical, it can experience periods of growth but the cyclical nature of the sector forces him to be more focused on value.
In fact, if you ask Lyon what he looks for in a stock, he passionately talks about price and profitability, “in the energy sector the main thing you must look for is profitability and the bottom line of the company. It is all about managing cost because these companies have very little control over the prices of a commodity. In the end, I look for companies that understand how to manage costs and then I try to buy those companies at reasonable prices.”
For Lyon, knowing the company is a good company is not enough. In fact he thinks it is easy to find good companies, “they are everywhere.” The challenge of a money manager is to pay the right price for good companies. Sometimes good companies cost too much. Lyon uses the example of Ballard Power “I love the company. I think it is a great company but I will only own it at the right price. When the stock issue came out at $150 per share, I felt the company was only worth $40 per share. Today, its trading at $51 per share. I may get to own this company yet.”
Lyon on managing the portfolio
“I review the portfolio daily. In managing the portfolio, I simply ask the same question for every holding, ‘If I did not own the stock already, would I buy it at today's prices.' If the answer is yes, then it stays in the portfolio. If no, then it's time to sell regardless of when I originally bought the stock.”
For Lyon, he never falls in love with a stock. In fact, he is always willing to sell a stock. This can be seen in his high turnover in the portfolio. Lyon thinks, “You should not hold a stock long term particularly when you are in a cyclical sector. There are times when you can make money and times when you will lose money depending on the sector environment. The long term returns for the energy sector was about 5.5%. Given that rate, Lyons would rather invest in T-Bills.
Lyon likes to hold between 30 to 50 stocks, “If I do the research, I am not afraid to take a significant position in a stock.”
View of the energy sector
Most reports I read are quite bullish on the Energy Sector. For Lyon he thinks it is significantly influenced by supply and demand.
Firstly, the supply of energy resources has become more scarce and should continue to hold that course. According to Lyon, “It is tougher to find resources like natural gas. Companies have drilled all the easy stuff. Now they must go deeper to reach the second tier supply. The problem is the cost of getting this second tier resource can increase costs by up to 50% more. Simple economics says that prices must go up if costs are going to increase accordingly. We need new production to drive prices down but companies are reluctant to spend a lot more money to find new supply and production. Basically, this has stretched the normal economic cycle.”
The other issue is demand. The slowing economy certainly has had implications on the energy sector. A continued pull back in the economy could hurt the energy sector even more.
My two cents
I recently had a client ask me to take a closer look at the energy sector and recommend a specific fund. In my journey, I wound up calling Bob Lyon because his track record in the energy sector was exceptional returning 38.9% in 2000 and 31.4% in 1999. This year to the end of June his fund is up 4.6% while the TSE 300 is down 12.7%. The CI Global Energy fund has received top ratings by Morningstar and Globefund.
No matter how well this fund has performed, it is a sector-based fund. Lyon tried to expand his investment opportunities by broadening his fund mandate but the fund still has a narrow focus. As a result, investors should be cautious about putting too much in a sector-based fund. Even Lyon invests most of his own money in the CI Signature Resource fund (which he also manages) because it has a broader mandate than the CI Global Energy Fund.
Jim Yih is author of Mutual Fundamentals, advisor with Kofin Financial Group and account representative of Manulife Securities International Ltd. Please send questions or comments to Jim at fax 780-436-3226 or email [email protected], For more information about Jim, visit www.fundfilter.com.
The information contained in this article was obtained from sources believed to be reliable, however, we cannot represent that it is accurate or complete. The views expressed are those of the author and not necessarily those of Manulife Securities International Ltd.
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