Perhaps it has always been this way, but it seems like there is much more uncertainty in the business environment these days. Interest rates are rising, and they may be at their peak… but then again, maybe not. Our economy still has high inflation… yet everyone’s talking recession. Many office buildings are only 50% occupied… will workers return? When? Regional banks are on uncertain footing (1) … and the national debt ceiling? … don’t even get me started!
In the face of this instability, last month Five States launched its 31st real asset energy fund (see page 9 for details), and we have been meeting with institutional and family office investors, many of whom acknowledge this state of affairs. From them we heard that while the business environment is perplexing, it hasn’t caused them to sit on the sidelines. On the contrary, they plan to be opportunistic and prepared for a coming upturn, with many believing that oil, gas, and other commodity investments will lead the way. To illustrate this point – last year, in April 2022, Five States was the only energy company invited to speak about its energy fund strategy at a well-known national conference. In comparison, at the same conference this year, April 2023, Five States was one of four energy companies invited to present. This is indicative of the level of attention oil and gas investments are now getting, especially from some of the nation’s most sophisticated investors.
Some recurring themes we heard at the conference include:
The dismal performance of most publicly traded equities last year left many portfolios out of balance, meaning there is now a disproportionately small fraction of value held in publicly traded securities and a higher fraction held in alternative asset classes such as private equity, real estate, and private credit. The result? A significant rebalancing of portfolios has begun, and it may take many months/years to bring some portfolios back into balance.
In contrast, the exceptional performance of oil and gas assets last year, coupled with heightened sensitivity to energy security and the ongoing war in Ukraine, have revealed that many investment portfolios currently lack enough exposure to the energy industry, and specifically oil and gas.
Further, most acknowledge that while conventional energy is not novel or sexy, and gets some negative publicity, oil and gas are fundamental to our economy. As such, energy assets are once again at the forefront of investor interest.
Most attendees believed that many macro factors point to a coming increase in oil and gas prices, and they want to be opportunistic now with the expectation of material price increases toward the end of the year.
The attention our fund strategy is getting is welcome but hardly unexpected. Why? Because investment strategies are sometimes like clothing styles; they can move in-and-out of fashion quickly and without warning. But like that navy-blue suit, the solid tee, or the black slacks in your closet, energy is an investment “essential” and should always have a place in your investment wardrobe (err… portfolio). Energy is a fundamental driver of a thriving society so it can never be ignored.
So, we aren’t surprised by the attention we’re getting because as a portfolio essential, energy investments such as Five States funds have weathered many investment cycles and are a key ingredient of any imaginable future and should always remain in fashion.