Commentaries

Energy

For the Period Ending: 12/31/2018

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

Market Update

World equity markets posted double-digit negative returns in broad market indexes in the fourth quarter with significant volatility again unsettling investors. Volatility hit the oil markets in the quarter, with oil prices rising to a four-year high in October before collapsing more than $30 per barrel in the fourth quarter.

Strong supply and demand fundamentals started to deteriorate in the second half of 2018, with concerns about slower global economic growth and its effect on demand; oversupply from OPEC and other producing countries; and stronger-than-expected growth in U.S. shale oil production.

Global trade began to slow during the quarter, driven by a variety of factors. It is expected that the U.S. economy will continue to grow in 2019 but at a materially slower rate, which may in turn lead to a pause in U.S. Federal Reserve (Fed) rate hikes and affect the relative performance of the U.S. dollar versus other currencies.

The oil market was surprised in the quarter when the U.S. granted waivers for Iranian oil exports to many countries. The waivers and stronger-than-expected U.S. production growth led to the market oversupply. OPEC and non-OPEC partners decided in December to cut production starting in January 2019 by 1.2 million barrels per day for a period of six months.

Portfolio Review

The strategy posted a negative return for the quarter and underperformed the negative return of the benchmark index.

Stock selection in the energy sector was the key detractor to performance. More than 40% of the portfolio was allocated to holdings in the Oil & Gas Exploration & Production industry segment, followed by about 26% to Oil & Gas Equipment & Services. Those industry segments underperformed the benchmark index and its heavier weighting to integrated oil companies, which contributed to the energy strategy’s relative underperformance overall.

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.

Outlook

We believe oil demand will continue to grow despite slower global economic growth and the production cuts by OPEC and partner states. We also think the reversal of some of the Iran sanction waivers will help rebalance the world oil market and support oil prices in 2019.

We believe OPEC took a positive and necessary step toward rebalancing the world oil market with its production cut decision and think the move will help support prices in 2019. We think these supply cuts along with continued oil demand growth, despite somewhat slower global economic growth, will eventually lead to a balanced market in 2019.

We think volatility in the oil markets will continue in 2019. The oil markets are concerned about a wide range of market and geopolitical issues, including demand growth because of slower worldwide economic growth and the effect of the U.S.- China trade dispute; greater supply growth because of U.S. shale oil production and uncertainty about whether U.S. shale companies will demonstrate capital discipline in an environment of lower oil prices; uncertainty about how much OPEC and Russia will cut production, based on the recent agreement, as well as OPEC’s long-term viability as a production cartel; and general unease about geopolitical tensions in Venezuela and across the Middle East.

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 December 31, 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. As an equity investment analyst, he covered 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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