The oil and gas sector has become so popular over the last three years that the number of commodities-oriented hedge funds alone has more than doubled, and demand for investment opportunities in the sector often outweighs supply. In fact, investor interest has been so strong—pardon the pun—that it has often fueled the price of oil and gas stocks more than any other factor in the market. And industry observers expect the sector’s popularity to remain strong for the foreseeable future. Nonetheless, fund managers and financial advisors warn that investments in this sector should be made cautiously and that investors need to be careful when it comes to the investment vehicles they choose.
“People have been chasing returns in the last few years, and that’s why there’s so much money flowing into the asset class and why there’s so many hedge funds investing. They’ve seen the returns, which have been good,” says Jon Yankee, CFO of Fox, Joss & Yankee LLC, a Reston, Va.-based financial planning firm with just over $200 million in assets under management. “But they haven’t looked at the returns in 1986, when oil and gas was down. People have been chasing returns without remembering that it’s a very volatile asset class.” Yankee believes exposure to oil and gas is important for his clients’ portfolios, and allocates an average of roughly 5 percent to the sector. Still, he remains cautious about how he accesses the sector, viewing investments in pure oil and gas companies or partnerships as far too risky. Favoring more diversification, his investment vehicle of choice for exposure to gas and oil is commodities mutual funds, which usually include other natural resources as well.
Dennis Barba, a managing partner with The Oxford Group of Raymond James & Associates in Cleveland, Ohio, also favors diversification when investing in oil and gas. In the past, Barba has traditionally relied on commodities and oil and gas ETFs to give his clients exposure to the sector. Recently, however, he believes that has become too volatile. So, at the end of the summer he completely removed oil and gas from his investors’ portfolios. “Right now we don’t have any exposure to this sector, because if you look at the technical aspects of it, it looks like these stocks are getting top heavy,” says Barba, whose firm has roughly $200 AUM. “Supply began to control the prices of those ETFs, so we elected not to invest there anymore.”