Commentaries

Energy

For the Period Ending: 9/30/2018

Portfolio Managers:
David P. Ginther, CPA
Michael T. Wolverton, CFA

Market Update

Global equity markets posted positive returns on the broad indexes in the third quarter, with U.S. equity markets again leading the way. The U.S. dollar maintained its strength versus most world currencies, supported by steady growth in the U.S. economy.

Global trade and economic activity continued to be strong. Markets generally shrugged off the growing trade tensions between the U.S. and China despite additional tariffs between the two countries. The Trump administration completed a revamp of the North American Free Trade Agreement with Mexico and Canada – named the U.S.-Mexico-Canada Agreement – but trade talks with China did not make similar progress.

Oil prices moved higher, with Brent crude oil moving above $80 per barrel, despite Saudi Arabia and Russia increasing their production near all-time highs to help offset lower production in Iran and Venezuela.

The Organization of Petroleum Exporting Countries (OPEC) met late in the quarter and made no changes to its output quotas for member states. The new sanctions put on Iran by the U.S. had a major impact on Iranian oil production and may reduce it as much as 1 million barrels per day.

Portfolio Review

The portfolio posted a positive return for the quarter and outperformed the energy benchmark index, although it trails the benchmark’s return for the year to date.

The focus of the energy strategy remains on investing in companies that can create value over the full course of the energy cycle. We identify those as companies that are low-cost operators, have strong balance sheets, have the ability to grow profitably and have strong return on capital.

The portfolio was allocated most heavily to holdings in the Oil & Gas Exploration & Production industry segment, and these in general contributed to relative performance. Allocations to domestic equity made up about 89% of net assets.

Outlook

Our outlook has not changed in the quarter. We believe we are in the early stages of a cyclical recovery, as demand is outpacing supply of oil and inventories continue to fall.

Demand growth continues but the global economic recovery is more muted. We expect global economic growth to continue steadily for the remainder of this year and in 2019.

We believe the majority of oil production growth will come from U.S. shale oil areas. We estimate U.S. oil output will increase more than 1 million barrels per day in 2018 and 2019. However, we think supply growth outside North America will be modest.

We are seeing early signs of an international recovery, perhaps starting in the second half of 2019, as oil prices move higher and capital spending starts to increase. National oil companies are starting to deal with a reserve replacement challenge brought on by the under-investing of the last three years, which was a result of lower oil prices. Global oil discoveries are close to a historic low, replacing only about 15% of production last year.

The opinions expressed are those of the portfolio manager(s) and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through September 30, 2018 and are subject to change due to market conditions or other factors. Any mention of investment performance refers to gross-of-fees performance, unless otherwise noted.
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Investment Team

David P. Ginther, CPA

Senior Vice President, Portfolio Manager

Mr. Ginther is co-portfolio manager of the firm’s Energy investment strategy and has served as a portfolio manager of the strategy since 2006. He has been portfolio manager of the firm’s Natural Resources funds since 2013. He was portfolio manager of the firm’s Dividend Opportunities funds from 2003 to 2013. He joined the firm in 1995 as an equity investment analyst, covering industries in the energy, materials and utilities sectors.

Mr. Ginther had previously been a senior business analyst with Amoco Corporation. He began his career with Amoco in 1986. He experienced a variety of opportunities while at Amoco related to exploration and international financial reporting.

Mr. Ginther earned a BS in Accounting from Kansas State University and also earned a Certified Public Accountant designation.

Michael T. Wolverton, CFA

Vice President, Portfolio Manager

Mr. Wolverton is co-portfolio manager of the firm’s Energy and Natural Resources investment strategies, appointed to this role in 2016. He had served as assistant portfolio manager to the strategies since 2013. He is also a member of the firm’s equity research team, covering energy equipment and services, and oil, gas and consumable fuels.

Prior to joining the organization in 2005 as an equity investment analyst, Mr. Wolverton held an intern position at the firm in summer 2004.

Mr. Wolverton earned an MBA with an emphasis in Finance from the University of Texas at Austin, McCombs School of Business and a BS in Accounting from William Jewell College.

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