In recent years, it’s been fashionable to take a bearish view of energy stocks. But not everybody is an energy bear. The manager of CI Canadian Investment Fund thinks energy outperformance is just getting started.
After underperforming the overall Canadian stock market in 2011 and 2012, energy stocks beat the market in 2013. This trend has continued for much of this year, but lately the energy sector has pulled back as soft global demand for oil has pushed prices for the commodity down.
But if you think the outperformance of energy is just beginning, and you want a diversified equity fund that has substantial exposure to the sector, then CI Canadian Investment Fund (CIG7425 (BE), CIG13585(FE), CIG1425(LL)) may be the fund for you. It seeks long-term capital growth by investing primarily in shares of major Canadian corporations. But the fund is also permitted to invest in foreign securities.
CI Canadian Investment’s portfolio adviser is Tetrem Capital Management, an investment management firm founded by Daniel Bubis in 2004.
Firm likes controversy
Tetrem adheres to a contrarian, value-based investment philosophy. Mr. Bubis and his team believe that controversy creates investment opportunities and by staying focused on the long-term value of a company, they can capitalize on irrational investor behavior to produce exceptional, risk-adjusted returns.
An investment controversy that has caught Mr. Bubis’ attention in recent years is the prevalence of bearish views toward energy. With regard to oil, the bears argue, growth in North American shale production has increased supply while demand has remained stagnant. The result is continued downward pressure on oil prices.
But Mr. Bubis thinks that oil prices are determined by global supply and demand. He points out that global oil consumption has grown for decades, and should continue to do so, thanks largely to demand in fast-growing emerging markets. Meanwhile, supply is being constrained on a global level as production rates from existing oil fields decrease, and the costs to find and develop new oil increase.
Mr. Bubis, therefore, thinks the marginal cost of oil production will rise in coming years, causing oil prices to follow suit. As prices rise, energy stocks will “re-rate higher on improved confidence”, turning them into market leaders in the current bull market.
In fact, Tetrem believes this re-rating is still in the early stages and will last until higher oil prices create demand destruction and an eventual decline in prices. But by that time, Tetrem anticipates that it will have already taken its profits in the sector.
In anticipation of rising energy prices, Tetrem has invested about 21 per cent of CI Canadian Investment Fund’s assets in the energy sector. The fund’s top holdings in the sector include Suncor Energy (3.3% of the portfolio), Canadian Natural Resources (2.4%) and Tourmaline Oil (2.3%).
If Tetrem’s bullish scenario for energy stocks does not play out as expected, the portfolio’s exposure to other industry sectors should lessen the blow. Outside of energy, the portfolio’s sector breakdown is as follows: financial services, 30.5 per cent; technology, 9.9 per cent; industrial services, 9.5 per cent; health care, 6.2 per cent; materials, 4.7 per cent; consumer stocks, 8.9 per cent; industrials, 4.1 per cent; utilities, 1.9 per cent; and fixed income, 0.6 per cent. Three per cent of the portfolio is held in cash.
Cyclical stocks should perform well
Assuming global economic growth continues to improve, the fund’s high exposure to economically sensitive sectors of the economy bodes well for performance. Certainly that has been the case this past year. Over this time, the fund has gained 22.9 per cent, to rank in the second quartile of the Canadian focused equity category.
CI Canadian Investment Fund has also been a relatively good long-term performer. Tetrem Capital became its portfolio manager in late 2006, following the departure of star manager Kim Shannon. Since then, the fund’s return these past seven years is an annualized 4.2 per cent, which ranks in the top quartile of the category. In six of the seven years, the fund performed in the top half of the category.
Volatility is higher than for most funds in the category, but is still relatively moderate. CI Canadian Investment Fund is a buy for investors who want a value-oriented, core Canadian equity fund and who can tolerate medium investment risk.
Canadian Mutual Fund Adviser, MPL Communications Inc.
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Canadian Mutual Fund Adviser •9/16/14 •