Institutional Strategies

Energy

The Energy strategy utilizes a long-term diversified approach and seeks opportunities around the world. The portfolio seeks to outperform the S&P Composite 1500 Energy Sector Index over full market cycles, while striving to keep risk low.

Investment Philosophy

The strategy's general investment philosophy includes the following:

  • Focus on energy market fundamentals
  • Energy is a cyclical industry that follows similar patterns through each cycle
  • A contrarian approach to commodity price trends increases opportunity for outperformance
  • We believe in investing in oil versus trading oil
  • Oil is a risky commodity that needs to be diversified through investment across the valuation spectrum, the cap spectrum and quality

Investment Process

The Energy strategy utilizes a top-down, fundamentally-driven research investment process that focuses on three main phases; establishing global market outlooks, identifying trends/sectors and stock selection.

We are a firm whose research techniques are based primarily on fundamental analysis. Therefore, we rely heavily on our internal research capabilities. The portfolio managers, David Ginther, CPA and Michael Wolverton, CFA work collaboratively with the rest of the firm’s investment professionals who provide support and analysis to help formulate global outlooks.

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.

3 years, 5 years, 10 years annualized. Returns are presented on a dollar-weighted basis and may be impacted by ongoing market volatility. Past performance is no guarantee of future results. Please inquire for more current performance information.

Total Returns1,2,3

Average Annual Total Returns as of 12/31/2018
(Returns for periods of less than 1-yr are not annualized)

  QTD YTD 1YR 3YR 5YR 10YR
Energy - Gross -37.51%  -33.47% -33.47% -7.13% -10.66% 2.00%
Energy - Net -37.64%  -34.03% -34.03% -7.92% -11.42% 1.14%
S&P Composite 1500 Energy Sector Index -25.41%  -19.31% -19.31% 0.21% -6.56% 3.19%

Calendar Year Returns1,2

  Energy Gross Energy Net S&P Composite 1500 Energy Sector Index
2018 -33.47%  -34.03%  -19.31%
2017 -11.76%  -12.51%  -2.05%
2016 36.43%  35.27%  27.31% 
2015 -21.69% -22.36% -22.07%
2014 -9.26% -10.03% -9.16%
2013 29.42% 28.32% 25.39%
2012 2.57% 1.70% 4.34%
2011 -8.47% -9.24% 3.92%
2010 24.22% 23.17% 21.37%
2009 41.94% 40.74% 16.41%

1Energy composite is comprised of 4 accounts that had $444.8 million in total assets as of 12/31/18. • Returns reflect the reinvestment of all dividends and other earnings. Portfolio returns are net of all foreign reclaimable and nonreclaimable withholding taxes, if applicable. Withholding taxes are recognized on an accrual basis or cash basis depending on client and/or account type. Additional information regarding treatment of withholding taxes is available upon request. Returns shown gross of fees reflect the deduction of commissions paid, but are gross of all other expenses. Net-of-fees returns are calculated by deducting the highest applicable advisory fee from the monthly gross composite return. The actual fees paid by a client may vary based on assets under management and other factors. A client’s return will be reduced by investment management fees and other expenses incurred in the management of a client’s account. Investment advisory fees are described in Part 2 of the ADV. Investment returns and the actual value of each client account will fluctuate, and at any given time an account could be worth more or less than the amount invested. • The benchmark selected for the composite is intended to provide a method to compare the composite’s performance to an index including securities that are generally similar to those that are included in the composite. However, composite holdings (and, accordingly, risk and volatility) may differ significantly from the securities tracked by its benchmark.

2S&P Composite 1500 Energy Sector is an unmanaged index comprised of securities that represent the energy sector of the stock market. It is not possible to invest directly in an index.

3QTD return from October 1, 2018 through December 31, 2018.

Data as of 12/31/2018

10 Largest Holdings

as a % of total assets

Concho Resources, Inc. 6.17%
Continental Resources, Inc.
4.77%
EOG Resources, Inc. 4.15%
Pioneer Natural Resources Co.
4.09%
Diamondback Energy, Inc.
3.94%
Phillips 66
3.74%
Marathon Petroleum Corp. 3.58%
Halliburton Co.
3.56%
WPX Energy, Inc. 3.51%
Valero Energy Corp. 3.25%

Country Allocation

as a % of equity assets

United States
88.65%
United Kingdom
3.93%
Netherlands
2.60%
Switzerland 2.57%
Canada  2.25%

Industry Allocation

as a % of equity assets

Oil & Gas Exploration & Production 42.71%
Oil & Gas Equipment & Services 25.26%
Oil & Gas Refining & Marketing 12.96%
Oil & Gas Drilling 6.75%
Oil & Gas Storage & Transportation
4.23%
Integrated Oil & Gas 4.16%
Data Processing & Outsourced Services 2.55%
Industrial Machinery 1.38%

Composite Composition1

Domestic Common Stock 87.03%
Foreign Common Stock 10.20%
Cash and Cash Equivalents 2.77%

Composite Total Assets1

Assets ($M) $444.8
Number of Accounts 4

Supplemental data: The Energy holdings, industry allocation and country allocation data shown are 1 of the 4 composite accounts without client specific investment restrictions and may not be reflective of the Energy composite as a whole or of any other Energy account currently, or in the future, included in such composite. The securities identified and described do not represent all of the securities purchased, sold or recommended for client accounts. The reader should not assume that an investment in the securities identified was or will be profitable.

1Energy composite is comprised of 4 accounts that had $444.8 million in total assets as of 12/31/18. • Returns reflect the reinvestment of all dividends and other earnings. Portfolio returns are net of all foreign reclaimable and nonreclaimable withholding taxes, if applicable. Withholding taxes are recognized on an accrual basis or cash basis depending on client and/or account type. Additional information regarding treatment of withholding taxes is available upon request. Returns shown gross of fees reflect the deduction of commissions paid, but are gross of all other expenses. Net-of-fees returns are calculated by deducting the highest applicable advisory fee from the monthly gross composite return. The actual fees paid by a client may vary based on assets under management and other factors. A client’s return will be reduced by investment management fees and other expenses incurred in the management of a client’s account. Investment advisory fees are described in Part 2 of the ADV. Investment returns and the actual value of each client account will fluctuate, and at any given time an account could be worth more or less than the amount invested. • The benchmark selected for the composite is intended to provide a method to compare the composite’s performance to an index including securities that are generally similar to those that are included in the composite. However, composite holdings (and, accordingly, risk and volatility) may differ significantly from the securities tracked by its benchmark.

2S&P Composite 1500 Energy Sector is an unmanaged index comprised of securities that represent the energy sector of the stock market. It is not possible to invest directly in an index.

3QTD return from October 1, 2018 through December 31, 2018.

As of 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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Key Features

Composite Performance History Since 4/1/2006 
Benchmark S&P Composite 1500 Energy Sector Index
Style Fundamental, Growth and Value
Target Alpha 300 bps above Index
Over full market cycles (3-5 years)
Peer Universe Equity Energy or Natural Resources
Typical Tracking Error 600-800 bps
Holdings Range 40-55
Max Position Size 6%
Sectors/Industries Industry max of 25%. Exposure diversified across industries such as: Exploration/Production, Equipment and Services, Store and Transportation, Refining and Marketing, Integrated Oil and Gas
International Exposure Typically less than 20%
Investment Vehicles Institutional Separate Account
U.S. Mutual Fund: Institutional Share Class
Variable Insurance Portfolio