Oil’s Impact on Portfolio Returns

Good day,

We’ve had a good start to the year in our second most widely used client portfolio (the Hudson Total Mandate Portfolio) with the majority of our holdings, most notably our largest global holding sub-managed by Mawer Investments showing a 13.39% return YTD. We continue to play the value game and feel that we are in the right places, and over the longer term, the allocation is positioned to do well.

The laggard in the portfolio has been the energy position which has contracted along with the entire energy sector this year. Although energy names were cheap from a valuation point of view at the beginning of this year, it seems they’ve gotten even cheaper softening the otherwise strong performance in the portfolio.

The market continues to concentrate on the wrong fundamentals and Eric Nuttall of Sprott who runs a big portion of Hudson’s energy component said it best: the sector continues to drop given “the level of apathy/disinterest towards the energy space” and the “forced liquidation on the part of some US hedge funds.”

Regarding the apathy and disinterest, Eric believes this has been overblown. Some energy names are “trading at the same levels as in January/February 2016 when oil was at $30/bbl.” As for the forced liquidation from some high profile, and low profile but large hedge funds, Eric notes that they either “wound down or decided to decrease their exposure to the energy sector (why be invested in an area that isn’t working at the moment when you can just go buy more Amazon and Google stock?).” This caused “total selling… ~$8BN over the past month and given the greatly reduced trading volumes this has had a magnified impact on the sector.”

That being said, our team expects future pricing in the latter half of the year to improve. The supply/demand story is far better than the market recognizes given the fixation on US supply growth rather than global supply growth. We’d also like to point out that there is a large reduction in new projects coming online beyond 2017/18. OPEC meets next week to discuss potentially extending the supply cuts to get to their target of $60 per barrel, which could be a catalyst for the sector. While we will have to wait and see if this materializes in the short term, I believe tremendous opportunity exists in the energy space and have increased my personal exposure earlier this week.

While overall market volatility crept up this week from record lows, as I write this markets are rallying around the world and with crude surpassing the $50/barrel, energy stocks are contributing to the upside.

Have a great long weekend.


Danny Popecu CFP, CIM, FMA, FCSI

President & CEO


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