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 in this role since 2006. He assumed portfolio manager responsibilities for the firm’s Natural Resources funds in 2013. He held portfolio management responsibilities for the firm’s Dividend Opportunities mutual funds from 2003 to 2013. He joined the firm as an equity investment analyst in 1995 and covered 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 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. He is a CFA charterholder.

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 9/30/2017
(Returns for periods of less than 1-yr are not annualized)

  QTD YTD 1YR 3YR 5YR 10YR
Energy - Gross 6.22%  -18.58% -12.22% -10.55% 0.56% 0.37%
Energy - Net 6.00%  -19.09% -12.96% -11.30% -0.29% -0.48%
S&P Composite 1500 Energy Sector Index 7.04%  -7.76% -0.91% -6.84% 0.34% 0.71%

Calendar Year Returns1,2

  Energy Gross Energy Net S&P Composite 1500 Energy Sector Index
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%
2008 -45.93% -46.39% -35.82%
2007 54.51% 53.20% 34.56%

1Energy composite is comprised of 5 accounts that had $846.1 million in total assets as of 9/30/17. • 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 July 1, 2017 through September 30, 2017.

Data as of 9/30/2017

10 Largest Holdings

as a % of total assets

Halliburton Co. 4.90%
RPC, Inc. 4.73%
Schlumberger Ltd. 4.57%
EOG Resources, Inc. 4.51%
Continental Resources, Inc. 4.35%
Pioneer Natural Resources Co. 3.70%
Parsley Energy, Inc. Class A 3.69%
Cimarex Energy Co. 3.40%
Concho Resources, Inc. 3.39%
Diamondback Energy, Inc. 3.04%

Country Allocation

as a % of equity assets

United States 90.31%
Canada 2.25%
Netherlands 2.24%
Switzerland 2.04%
Bermuda 1.78%
United Kingdom 1.38%

Industry Allocation

as a % of equity assets

Oil & Gas Exploration & Production 47.03%
Oil & Gas Equipment & Services 32.74%
Oil & Gas Storage & Transportation 7.33%
Integrated Oil & Gas 4.43%
Oil & Gas Drilling 4.43%
Oil & Gas Refining & Marketing 2.11%
Data Processing & Outsourced Services 1.93%

Composite Composition1

Domestic Common Stock 89.00%
Foreign Common Stock 9.53%
Cash and Cash Equivalents 1.47%

Composite Total Assets1

Assets ($M) $846.1
Number of Accounts 5

Supplemental data: The Energy holdings, industry allocation and country allocation data shown are 1 of the 5 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 5 accounts that had $846.1 million in total assets as of 9/30/17. • 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 July 1, 2017 through September 30, 2017.

As of 9/30/2017

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

Market Sector Update

  • Stocks around the world continued to post gains in the quarter. Oil stocks generally rose toward the end of the third quarter as oil prices stabilized around $50 per barrel, although the sector overall has been disappointing over the course of 2017.
  • Two major hurricanes made landfall in Texas and Florida during the quarter, causing loss of life and widespread damage. While difficult to estimate with accuracy now, we think there may be a slightly negative effect on third-quarter U.S. gross domestic product (GDP). However, for all the damage to life and property, history shows that natural disasters ultimately have a net positive effect on GDP because of the rebuilding and replacement that follow.
  • Hurricane Harvey’s impact was felt across a wide section of the energy corridor in Texas. About 25% of total U.S. refining capacity was offline, while most of the oil production in the Gulf of Mexico and in Texas was spared. No refineries in the Houston area reported major damage from the storm, although many were hit with flooding and related storm effects. The price of crude oil slumped as demand slowed after Harvey, since refineries could not accept it, while the price of gasoline and other refined products climbed on continuing demand and the reduced supplies.
  • In terms of the U.S. energy industry, we anticipate a relatively short-term impact from Harvey and no long-term damage to refining capacity or the energy infrastructure. Most of the affected parts of the industry were returning to normal operations by the quarter’s end.

Portfolio Strategy

  • The portfolio posted a positive return for the quarter that was less than the positive return of its benchmark index.
  • The focus remains on owning companies that can create value over the full course of the energy cycle. We target companies that are low-cost operators, have strong balance sheets, have the ability to grow profitably and have strong return on capital.
  • Key contributors to performance during the quarter relative to the portfolio’s benchmark index included companies involved in the exploration and production (E&P), and equipment and services industry segments.
  • Key detractors to relative performance included an underweight position relative to the benchmark index in a major integrated oil and gas company, as well as positions in equipment and services, E&P, and storage and transportation companies.

Outlook

  • Despite an abundance of supply sources for oil, the industry is in the early stages of a cyclical recovery as oil fundamentals have begun to improve.
  • We think there is the potential for modest revenue growth for energy companies. Margins and returns also are likely to improve from their cycle lows in 2016. We believe the main drivers of this growth will be higher volume, higher capacity utilization and continued improvement in cost efficiency.
  • We expect demand for oil in the short-term to remain solid in a range of 1.0-1.4 million barrels per day. Worldwide oil inventories continue to fall as demand has been better than expected, while supply growth has been constrained by lower oil prices and high compliance by Organization of Petroleum Exporting Countries with output quotas.
  • The world oil market is expected to be heavily influenced by the supply fluctuation from U.S. shale, which has become the de facto swing supplier of oil. Oil supply from U.S. shale is still a small percentage of worldwide demand, but more importantly, it is likely to be about 75% of the supply growth in the world in the next year.
  • Our outlook overall has not changed in the quarter. Demand surprised us the most in the quarter, led by improving emerging markets, and we expect steady global economic growth to continue in the remainder of 2017 and 2018.
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, 2017 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 55-65
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
Non-U.S.: UCITS