Despite the fact that the energy sector is a volatile one, Hennessy chief investment officer remains overweight on energy stocks. He expects to see an 4% gain in U.S. stocks this year, and is optimistic about oil and gas companies, Utilities, and Materials.
Oil and gas companies
Despite the rising oil prices, the Hennessy Energy Transition Fund remains overweight on oil and gas companies, according to its chief investment officer. Hennessy has a diversified portfolio of holdings, including Schlumberger Ltd., EOG Resources Inc., and Antero Resources Corp. But with oil futures hovering around $100 a barrel, it’s time to revisit this strategy.
In the past, boom and bust cycles have seen rapid surges and declines in oil prices. However, a recent survey of fund managers indicates that they have started to take more notice of the energy sector after several years of underweighting. In fact, the BofA Global Research survey shows that allocations to energy stocks have increased by 23 percentage points in the last month alone.
Some fund managers have been worried about the impact that the oil price rally could have on the future of the commodity. But, some fund managers say that the rally will help draw money managers into the sector.
Despite a rocky start to the year, the Hennessy chief investment officer remains bullish on the utilities sector. As such, his fund has made several tweaks to its asset allocation in the last couple of quarters. For instance, the fund’s energy sector exposure has decreased from about 40% to about 25%. Similarly, the fund’s consumer staples sector exposure has increased from about 10% to about 20%.
The fund’s rebalancing has been a boon for investors, with the fund’s net assets soaring by more than 50% in the last few quarters. Among the fund’s new additions are several utility stocks, including Duke Energy Corporation, Florida Power & Light Company, Public Service Company of New York and Southern Company. Other notable holdings include Antero Resources Corp., EOG Resources Inc., and Schlumberger Ltd.
Despite rising interest rates, Hennessy chief investment officer Mark O’Sullivan remains overweight on energy. Hennessy’s Focus 30 Fund has a slew of energy stocks, including EOG Resources Inc. and Schlumberger Ltd.
Similarly, Hennessy’s Energy Transition Fund has an impressive holdings list, which includes Antero Resources Corp. and Schlumberger Ltd. This fund is overweight on energy, but it is also overexposed to traditional oil companies.
Hennessy’s portfolio management team is finding better opportunities in companies with lower valuations and more reasonable estimates of potential earnings. This was also the case in the past quarter, when it added a number of new positions.
For example, it added to its consumer discretionary holdings, which include a variety of companies offering discounted merchandise. In a recent interview, O’Sullivan said the focus 30 fund is “taking a look at what the market is telling us and then applying that knowledge to our portfolio.”
In general, Hennessy believes the market is going to continue to operate in a low-growth, slow-moving mode. He says investors are on edge about rising interest rates, which threaten to tip the global economy into a recession. He says the market will eventually move to a more rational trading environment, one that trades on sound fundamentals.
Inflation and interest rates
Having spent the last three months tightening monetary policy, the Fed continues to push through its timeline. A September survey of American households showed expectations of inflation rising to 5.3%. This could lead to greater volatility around tapering.
As well, recent economic surprise indicators indicate that the slowdown is finally starting to bottom out. This is likely to result in upward trending equity markets.
But with higher interest rates on the horizon, the headwinds for current valuations are strong. Higher inflation expectations will also have an impact on the Fed’s view of the economy.
The Fed’s recent JOLT data suggests that job openings are significantly higher than expected. This is a positive sign for consumer spending, which is the bright spot in the economy. But companies are facing a downward earnings risk because of weak demand.