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 3/31/2019
(Returns for periods of less than 1-yr are not annualized)

  QTD YTD 1YR 3YR 5YR 10YR
Energy - Gross 16.89%  16.89% -16.99% -2.64% -8.91% 4.38%
Energy - Net 16.64%  16.64% -17.69% -3.47% -9.68% 3.50%
S&P Composite 1500 Energy Sector Index 16.71%  16.71% 0.21% 4.20% -3.82% 6.07%

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 $499.2 million in total assets as of 3/31/19. • 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 January 1, 2019 through March 31, 2019.

Data as of 3/31/2019

10 Largest Holdings

as a % of total assets

Concho Resources, Inc. 5.41%
Continental Resources, Inc.
4.26%
Pioneer Natural Resources Co.
4.00%
Valero Energy Corp.
3.63%
Diamondback Energy, Inc.
3.63%
Phillips 66
3.61%
EOG Resources, Inc. 3.43%
WPX Energy, Inc. 3.41%
Marathon Petroleum Corp.
3.37%
Halliburton Co. 3.29%

Country Allocation

as a % of equity assets

United States
88.77%
United Kingdom
3.81%
Switzerland
2.69%
Netherlands 2.54%
Canada  2.18%

Industry Allocation

as a % of equity assets

Oil & Gas Exploration & Production 40.37%
Oil & Gas Equipment & Services 27.52%
Oil & Gas Refining & Marketing 12.91%
Oil & Gas Drilling 7.04%
Integrated Oil & Gas 3.98%
Oil & Gas Storage & Transportation
3.51%
Data Processing & Outsourced Services 2.92%
Industrial Machinery 1.75%

Composite Composition1

Domestic Common Stock 88.16%
Foreign Common Stock 10.19%
Cash and Cash Equivalents 1.65%

Composite Total Assets1

Assets ($M) $499.2
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 $499.2 million in total assets as of 3/31/19. • 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 January 1, 2019 through March 31, 2019.

As of 3/31/2019

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

Market Update

Global equity markets posted positive returns on the broad indexes. The energy and materials sectors also posted positive returns during the quarter, with energy outperforming and materials underperforming the broader equity market.

Volatility continued in the oil markets. Crude oil prices rebounded significantly higher in the quarter. West Texas Intermediate, the U.S. benchmark, was up about 30% and falling 45% in the fourth quarter and Brent, the global benchmark, was up slightly more.

The OPEC supply reduction announced in December 2018 provided a positive stimulus for the oil market. OPEC’s policy change was in response to waivers granted by the U.S. that allowed Iran to continue exporting oil to approved nations. As a result of the decreased supply from OPEC, global oil inventories declined in the quarter. Political disruptions and geopolitical issues led to lower production from Venezuela and Libya.

The Trump Administration is set to decide by early May if wavers that allowed countries to buy crude oil from Iran — despite U.S. sanctions — will be extended. The waivers were the initial reason the oil market became oversupplied.

The U.S. continued to grow oil production in the quarter, even as the rig count declined slightly. Lower rig count was driven by lower oil prices in the prior quarter as well as lower capital expenditures as producers aimed to generate more free cash flow.

Portfolio Review

The strategy had a positive return for the quarter. It matched the positive return of its benchmark index.

Key equity contributors to performance relative to the benchmark mainly were in the Oil & Gas Equipment & Services industry segment. Key detractors to relative performance mainly were in the Oil & Gas Transportation & Storage industry segment.

The largest industry allocation in the strategy was to the Oil & Gas Exploration & Production segment, followed by Oil & Gas Equipment & Services and Oil & Gas Refining & Marketing. The allocation to domestic equity was steady from the prior quarter at about 88% of net assets.

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 expect the oil market price rebalancing that occurred in the quarter to continue, with OPEC expected to maintain production cuts into the summer. U.S. production growth is expected to decelerate but still grow in excess of 1 million barrels per day in 2019. U.S. supply growth is expected to be roughly in-line with global oil demand.

U.S. rig count, after declining in the quarter, is likely to remain flat as producers show spending discipline even with higher oil prices. Exploration and production companies are seeing more pressure from investors to be more prudent in allocating capital in order to generate better investor returns. This discipline could be tested in the second half of 2019 if oil prices remain in the current range or higher.

We believe the worldwide demand growth rate continues to be the greatest risk to oil prices going forward. Demand growth for this year has been better than expected, despite a synchronized global economic slowdown.

Infrastructure constraints continue in the Permian Basin for crude oil and natural gas, with some relief forecast for the fourth quarter, based on an expected increase in pipeline capacity.

Energy equities have lagged the appreciation in oil prices this year, but we think that gap will be reduced throughout the year as equities gain back some ground versus the commodity.

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, 2019 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