This article was written by Angelos Damaskos, CEO, Junior Oils Trust and Sector Investment Managers, for the Oil Council's e-Magazine, Drillers and Dealers.
The year that went by was one of the most volatile periods for equity markets in modern history. The year started in the middle of a severe credit crisis with central banks pumping record amounts of liquidity to rescue the banking system. Investor confidence was frozen and by early March global equity markets were trading at levels not seen in decades.
In March, however, several indicators pointed to a turnaround. First, everyone was despondent, sentiment was bleak and flight out of equities was faster than it had been for decades. Second, commodity prices had stabilised and started a slow rise in response to re-stocking by industrialising China and India. Third, commodity producing companies experienced higher levels of corporate activity indicating that strategic investors maintained their confidence in the long-term demand for energy and basic materials. Equity markets then started what was to be the greatest bear-market rally seen in recent history.
In such market conditions, it has become apparent that there were few successful investment strategies especially as all asset classes experienced high volatility regardless of fundamentals. One of the best would have been to be patiently invested in well- capitalised energy and basic materials producing companies which had little debt and owned solid commodity producing assets, riding the market turbulence of the last two years. The commodities sector not only produced the best returns in 2009 but recovered all of its losses of 2008 which, as we know, was a terrible year. By comparison, the largest equity market indices in the UK, US and Europe ended 2009 well below their start of 2008.
In managing the Junior Oils Trust, our approach was largely one of patiently believing in the fundamental value of our portfolio holdings. In the crisis of the last quarter of 2008, we did prune the portfolio out of those companies with weaker balance sheets and high reliance on exploration success for their progress. We invested, instead, in high-yielding convertible debt issues of companies such as Dana Petroleum Plc, Soco International and Norwegian Energy Company. The rest of the portfolio, comprising two thirds of the fund’s value, was run following the development of the markets. This strategy proved quite successful in the first quarter of 2009 when the…
