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.

Prior to joining Waddell & Reed, Mr. Ginther was 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 Waddell & Reed 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 6/30/2017
(Returns for periods of less than 1-yr are not annualized)

  QTD YTD 1YR 3YR 5YR 10YR
Energy - Gross -17.92%  -23.35% -10.41% -14.90% 1.22% 0.70%
Energy - Net -18.09%  -23.67% -11.17% -15.62% 0.36% -0.16%
S&P Composite 1500 Energy Sector Index -7.23%  -13.82% -5.07% -11.74% 0.92% 0.91%

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 $827.7 million in total assets as of 6/30/17. • 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 April 1, 2017 through June 30, 2017.

Data as of 6/30/2017

10 Largest Holdings

as a % of total assets

Halliburton Co. 4.76%
Schlumberger Ltd. 4.52%
U.S. Silica Holdings, Inc. 4.51%
EOG Resources, Inc. 4.42%
Parsley Energy, Inc. Class A 4.07%
RPC, Inc. 4.04%
Pioneer Natural Resources Co. 3.89%
Continental Resources, Inc. 3.81%
Baker Hughes, Inc. 3.73%
Concho Resources, Inc. 3.28%

Country Allocation

as a % of equity assets

United States 90.63%
Switzerland 2.53%
Netherlands 2.23%
Bermuda 1.84%
Canada 1.79%
United Kingdom 0.99%

Industry Allocation

as a % of equity assets

Oil & Gas Exploration & Production 44.81%
Oil & Gas Equipment & Services 35.09%
Oil & Gas Storage & Transportation 7.76%
Oil & Gas Drilling 4.10%
Integrated Oil & Gas 4.03%
Oil & Gas Refining & Marketing 2.03%
Data Processing & Outsourced Services 1.89%
Specialty Chemicals 0.29%

Composite Composition1

Domestic Common Stock 89.18%
Foreign Common Stock 8.81%
Cash and Cash Equivalents 2.01%

Composite Total Assets1

Assets ($M) $827.7
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 $827.7 million in total assets as of 6/30/17. • 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 April 1, 2017 through June 30, 2017.

As of 3/31/2017

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

Market Sector Update

  • Global equities closed the quarter in positive territory but the energy sector declined. Crude oil prices were somewhat volatile and traded in a tight range.
  • Oil inventories outside the U.S. fell in the quarter as U.S. inventories increased. We expect U.S. production to be up 700,000 barrels per day (bpd) by year end. The changes took place despite the implementation of production cuts by the Organization of Petroleum Exporting Countries (OPEC) that were agreed late in 2016, which pressured equities and oil prices.
  • The U.S. Federal Reserve (Fed) in March announced 0.25-percentage-point hike in the fed funds interest rate that moved it to 1%. The Fed has indicated that economic improvements could mean a faster pace of rate hikes in 2017 than had previously been expected. Markets generally anticipate two more interest rate hikes this year.
  • President Donald Trump promised fiscal stimulus, tax reforms and reduced financial regulation would be part of his early agenda. The potential impact of Trump’s pro-growth agenda drove a move into more economically sensitive equity sectors and market segments early in the quarter. It then became clear the new administration and Congress may not be able to act as quickly as had been hoped. The decision to focus on the Affordable Care Act (ACA) repeal/replace rather than corporate and individual tax reform, for example, unsettled some markets, especially when the Congress was unable to agree on new health care legislation. Many in the market began to anticipate any fiscal stimulus would be pushed to early 2018.

Portfolio Strategy

  • The portfolio posted a negative return for the quarter that was in line with the negative return of its benchmark index.
  • Key detractors to performance in the quarter included holdings in energy services firms, and in exploration & production companies.
  • If oil and other commodity prices are not rapidly rising, we believe high-quality companies with the lowest cost resources, strong balance sheets and highest returns should benefit the most. Therefore, we continue to focus on these types of companies in the portfolio.

Outlook

  • We think oil demand is steadily growing in 2017 at a pace of 1.2 million to 1.4 million bpd. After two years of slowing supply growth, we believe we are in the beginning stages of supply reacceleration in certain areas of the world, with the U.S. showing the fastest move. We also think the pace of supply growth in the U.S. could reach 1 million bpd by the end of 2017.
  • An oil price in $50-60 range should provide ample cash flow to allow continued supply growth from the U.S. for the next several years. We believe the U.S. will be the largest contributor to global supply growth for the near future. Therefore, we think U.S.-focused production companies are likely to have the highest growth rates and offer opportunities to reduce their cost of production through productivity gains. We think these improvements will be most pronounced in the Permian Basin.
  • If OPEC continues its current policy of reduced output, we think oil prices will remain stable with some upward bias, provided inventories are being liquidated. If OPEC changes its strategy and reverts to higher production, we believe it would pose a bearish threat to prices. While we do not expect such a change, we think a move into the $40 per barrel range would be likely to slow rig activity in the U.S.
  • We think global economic growth will pick up in 2017 and 2018. We believe strength in the dollar will depend on a variety of factors, including the potential for the Fed to become more hawkish while other central banks are on the sidelines, and potential for major fiscal stimulus and regulatory rollbacks in the U.S.
The opinions expressed in this commentary are those of the portfolio managers and are current through March 31, 2017. The managers' views are subject to change at any time based on market and other conditions, and no forecasts can be guaranteed. Past performance is no guarantee of future results. 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