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. 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 6/30/2018
(Returns for periods of less than 1-yr are not annualized)

  QTD YTD 1YR 3YR 5YR 10YR
Energy - Gross 11.42%  4.37% 20.15% -0.95% 0.53% -1.13%
Energy - Net 11.18%  3.93% 19.14% -1.79% -0.32% -1.97%
S&P Composite 1500 Energy Sector Index 14.32%  7.43% 22.11% 3.08% 1.62% 0.47%

Calendar Year Returns1,2

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

1Energy composite is comprised of 2 accounts that had $785.9 million in total assets as of 6/30/18. • 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 April 1, 2018 through June 30, 2018.

Data as of 6/30/2018

10 Largest Holdings

as a % of total assets

Continental Resources, Inc. 5.05%
EOG Resources, Inc.
4.04%
Halliburton Co. 3.96%
Parsley Energy, Inc. Class A
3.91%
Pioneer Natural Resources Co.
3.89%
Whiting Petroleum Corp. 3.70%
Schlumberger Ltd. 3.70%
Diamondback Energy, Inc.
3.70%
WPX Energy, Inc.
3.69%
Oasis Petroleum, Inc. 3.30%

Country Allocation

as a % of equity assets

United States
91.51%
Netherlands 2.38%
Canada 2.12%
Switzerland 2.09%
United Kingdom  1.89%

Industry Allocation

as a % of equity assets

Oil & Gas Exploration & Production 47.50%
Oil & Gas Equipment & Services 28.16%
Oil & Gas Refining & Marketing 8.21%
Oil & Gas Drilling 5.82%
Integrated Oil & Gas 3.56%
Oil & Gas Storage & Transportation 3.09%
Data Processing & Outsourced Services 2.46%
Industrial Machinery  1.20%

Composite Composition1

Domestic Common Stock 90.79%
Foreign Common Stock 8.42%
Cash and Cash Equivalents 0.78%

Composite Total Assets1

Assets ($M) $785.9
Number of Accounts 2

Supplemental data: The Energy holdings, industry allocation and country allocation data shown are 1 of the 2 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 2 accounts that had $785.9 million in total assets as of 6/30/18. • 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 April 1, 2018 through June 30, 2018.

As of 3/31/2018

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

Market Update

Global equity markets declined slightly in the quarter as volatility increased. Energy and materials under performed the broader equity market as growth concerns weighed on returns.

Oil prices moved higher in the quarter while base metals moved lower, based on fears of slowing demand from China. Global trade and economic activity continued to be strong but markets reflected increasing geopolitical concerns, including the potential for a trade war between the U.S. and China following the imposition of tariffs between the two countries. Investment in U.S. oil supply continued to ramp higher as evidenced by increasing capital spending and a rising rig count. The majority of the investment continued to be directed at the Permian Basin, where oil supply is ample and break even prices are low on the cost curve. As a result, supply is accelerating rapidly in the U.S. while most other parts of the world are seeing supply declines. The overall oil market remained slightly under supplied as of the end of the quarter and global inventories continued to trend lower.

Portfolio Review

The Energy strategy slightly underperformed the S&P 1500 Energy Index, which had a negative return during the quarter. The strategy continues to focus on companies that can create value over the full course of the energy cycle, targeting those that are low-cost operators, have strong balance sheets, have the ability to grow profitably and have strong return on capital. Exposure to integrated oil companies and exploration & production companies were primary contributors during the quarter, but those were offset by detractors that primarily were in the oil & gas equipment & services industry segment.

Outlook

Our outlook has not changed in the quarter, as we believe we are in the early stages of a cyclical recovery. Demand surprised us the most in the quarter, led by improvement in emerging markets, and we expect global economic growth to continue in 2018. We expect U.S. oil production will continue ramping higher and lead the U.S. to have the strongest supply growth of any country in the world. We believe this supply will satisfy the majority of world demand for oil.

Early signs have emerged that the Permian Basin is dealing with logistical bottlenecks and production capacity constraints, which could create pricing issues in that region. Worldwide oil inventories continue to fall as demand has been better than expected, supply growth has been constrained by lower oil prices and the Organization of Petroleum Exporting Countries (OPEC) continues to constrain supply. We think global oil inventories will remain at or below the five-year average if OPEC supply is capped. This would be supportive for world oil prices. Geopolitical issues from OPEC compliance, risks from the war in Syria, new sanctions on Iran and Venezuela, and potential tariffs and trade wars have become more of a concern as supply and demand are in a deficit. Despite strong oil supply growth in the U.S., producers are signaling their intent to be more capital disciplined in the coming years and returning more free cash flow to shareholders. This behavior would support oil prices if it fully develops. We believe U.S. shale oil continues to offer opportunities. Companies continue to improve efficiency and productivity, and manage costs effectively.

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 March 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 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