Question: With investor concerns about China, interest rates and oil prices taking centre stage and valuations considered fairly valued, how do you view the oil and gas sector today? Are you currently invested in oil and gas companies in Trimark Europlus Fund?
We are seeing opportunities in businesses with exposure to oil and gas. However, we will not hold any exploration and production (E&P) companies because we believe these businesses are lower quality, with low returns on invested capital. Instead, we are focused on investing in high-quality businesses that produce niche, high-value-added products or those that are involved in the servicing of oil and gas companies.
For example, we recently purchased a company in Trimark Europlus Fund that provides testing, inspection and certification services to companies related to meeting quality, safety and environmental protection standards. The nature of this particular business allows it to generate stable revenue streams. The company’s 20% exposure to energy1 resulted in share-price weakness, giving us the opportunity to invest at what we consider a discounted price.
At the beginning of 2015, we viewed the market as overvalued and valuations became even more stretched later in the year – the MSCI Europe Index gained over 20% at its peak in August of this year.2 A pullback in that month erased a significant portion of those gains and, in our view, European valuations became fairly valued. Despite this, we did find select opportunities in energy-related businesses (along with a few key opportunities in European businesses with emerging-markets exposure).
If you have any questions, please leave them in the comments area below.
1 Source: Invesco Canada, as at October 31, 2015.
2 Source: Morningstar Research Inc., as at August 4, 2015.
Note: The company listed above is for illustrative purposes only and is not intended as specific investment advice.