Which fund to catch some upside from a possible rise in the price of oil?

grey_gym_sock

oil company shares are 1 sector of equities, and you might (with mild optimism) hope to get a total return of inflation + 5% p.a. from equities generally. by picking any 1 sector, you will get more erratic returns than from a fund diversified across most sectors; it could equally well be higher or lower.

the oil price is a commodity, and for any commodity the best long-term guess would have to be that its price will roughly match inflation, i.e. 0% real return, but with huge volatility along the way, perhaps more volatility than equities.

oil futures (similarly to futures for most commodities) have a handicap compared to the oil price itself, because they are in backwardation, i.e. (roughly speaking) the price of oil to be delivered at some future date is generally higher than the price of oil to be delivered now. this implies that the returns from oil futures if likely (though not certain) to be lower than the theoretical returns from the oil price itself. so you're looking at worse than 0% real return.

certainly there is correlation between oil company share prices and oil price futures, but no, they are not at all roughly the same thing in the long run. oil companies do (collectively, though some don't) still make profits even at current oil prices. owning a barrel of oil doesn't make a profit unless the oil price rises. and owning oil futures is probably worse than just owning the barrel of oil (and you can't do the latter).

note that some investors have a small fixed allocation (e.g. 5%) in their portfolio for (a broad basket of) commodity futures, not because they expect high returns from it - they don't - but because they hope to reap gains from its huge volatility. commodities behave very differently to shares; there is a fair chance that, if they rise dramatically, shares will be falling dramatically at the same time, and holding a small allocation of commodities will give them the chance to rebalance back to their original allocations, selling expensive commodities in order to buy cheap shares; and similarly, in the other direction, when shares soar and commodities crash. that is a strategic use of commodities.

just buying oil futures on the hope that they'll go up is gambling. in that the expected real return from commodity futures alone is negative - which is pretty much the definition of gambling.

veryintrigued

The Bathstore is a good bet.

I tend to fill up the bath with petrol when it's cheap.

Others must do this too?

tmsbry

Artemis Global Energy Fund

BrockStoker

bigfreddiel wrote: »

Why?

What does it give over and above the more widely accepted platforms?

It seems to have strange quirks, like fund classes and funds that I can't find elsewhere (although I have no experience with other platforms so I can't say for sure - but googling often provides few/no results), and some classes of commonly available funds that should have an AMC are listed as not having an AMC.

I'm not sure it does offer anything above the better known platforms (apart from the above mentioned aspect perhaps, and excellent customer service IMO), but it's what my previous IFA used to get me started, and it seems adequate for my purposes, so I have stuck with it although buying/selling fees for funds are quite a bit more than most would be used to.

bigfreddiel wrote: »

Is your investment in an ISA wrapper?

I think so... at least it's the same end result in terms of tax ie I don't pay any for my assets that are held there.

BrockStoker

grey_gym_sock wrote: »

oil company shares are 1 sector of equities, and you might (with mild optimism) hope to get a total return of inflation + 5% p.a. from equities generally. by picking any 1 sector, you will get more erratic returns than from a fund diversified across most sectors; it could equally well be higher or lower.

the oil price is a commodity, and for any commodity the best long-term guess would have to be that its price will roughly match inflation, i.e. 0% real return, but with huge volatility along the way, perhaps more volatility than equities.

oil futures (similarly to futures for most commodities) have a handicap compared to the oil price itself, because they are in backwardation, i.e. (roughly speaking) the price of oil to be delivered at some future date is generally higher than the price of oil to be delivered now. this implies that the returns from oil futures if likely (though not certain) to be lower than the theoretical returns from the oil price itself. so you're looking at worse than 0% real return.

certainly there is correlation between oil company share prices and oil price futures, but no, they are not at all roughly the same thing in the long run. oil companies do (collectively, though some don't) still make profits even at current oil prices. owning a barrel of oil doesn't make a profit unless the oil price rises. and owning oil futures is probably worse than just owning the barrel of oil (and you can't do the latter).

note that some investors have a small fixed allocation (e.g. 5%) in their portfolio for (a broad basket of) commodity futures, not because they expect high returns from it - they don't - but because they hope to reap gains from its huge volatility. commodities behave very differently to shares; there is a fair chance that, if they rise dramatically, shares will be falling dramatically at the same time, and holding a small allocation of commodities will give them the chance to rebalance back to their original allocations, selling expensive commodities in order to buy cheap shares; and similarly, in the other direction, when shares soar and commodities crash. that is a strategic use of commodities.

Thanks for explaining, although I'm not sure what you mean when you say "0% real return". If the ETF goes up 10% after I buy it, and then I sell it, won't I have and extra 10% over and above my initial investment in my cash account?

That was my plan - to help me rebalance and help with diversification since there should be less correlation with my other holdings.

grey_gym_sock wrote: »

just buying oil futures on the hope that they'll go up is gambling. in that the expected real return from commodity futures alone is negative - which is pretty much the definition of gambling.

But isn't that no different to ordinary equities/funds in general? All my equities are held because I hope they will go up in value!

Obviously, all of them going up at the same time is not very useful, so diversifying into oil seems like a reasonable proposition to me, especially considering how low the price of oil is now. I realize it could well go down before it goes up again, but the price can't stay low for ever, so I'm guessing I'm not wrong in thinking that holding an asset that is very closely linked to oil isn't a bad idea right now?

Thanks once again to yourself and all who have taken the time to reply!

grey_gym_sock

"0% real return" is just an average. if it goes up 10% and you sell, then your real return is 10% minus inflation (so if that happens within a year or 2, perhaps 8% or 9% real return).

there is always an unknown element to returns - and the variability of returns is huge for both shares and commodities. however, the expected (i.e. average likely) real return for shares is perhaps 5% a year, compared to minus something for commodity futures. what you get is then the average plus or minus some large variation. it's just that you start out ahead with shares, compared to commodity futures, due to their higher average returns.

the above is all an argument against oil futures, not against oil shares.

can the oil price stay low forever? well, maybe, depending how you define low. however, you could buy oil futures, and the price could rise, and you could still fail to make money from it, due to
(a) the headwind from backwardation - the longer the oil price takes to rise, the more of a problem this is;
(b) you may not sell at the right time, because you think it will rise further and actually it falls.
you can set a target price, of course, e.g. plan to sell when the oil price rises by $10 or $20 or whatever. if you make the target rise small enough, then there will be a high chance of making a small profit, but a small chance of making a large loss, if the price rises not quite far enough and then falls again, and doesn't recover to your target until such a long time that you'd have been better doing something else (less risky) with your money. or you can set a higher target, increasing the profit if it's hit reasonably quickly, but decreasing the probability that that will happen. but there is no obvious place for a target price where the odds are in your favour.

so far as oil shares go, is adding them now increasing your diversification? well, if you have exposure to most other sectors of shares, but not oil, then yes it is. but if you already have general funds which cover the oil sector among others, then not really.

BrockStoker

grey_gym_sock wrote: »

"0% real return" is just an average. if it goes up 10% and you sell, then your real return is 10% minus inflation (so if that happens within a year or 2, perhaps 8% or 9% real return).

there is always an unknown element to returns - and the variability of returns is huge for both shares and commodities. however, the expected (i.e. average likely) real return for shares is perhaps 5% a year, compared to minus something for commodity futures. what you get is then the average plus or minus some large variation. it's just that you start out ahead with shares, compared to commodity futures, due to their higher average returns.

the above is all an argument against oil futures, not against oil shares.

can the oil price stay low forever? well, maybe, depending how you define low. however, you could buy oil futures, and the price could rise, and you could still fail to make money from it, due to
(a) the headwind from backwardation - the longer the oil price takes to rise, the more of a problem this is;
(b) you may not sell at the right time, because you think it will rise further and actually it falls.
you can set a target price, of course, e.g. plan to sell when the oil price rises by $10 or $20 or whatever. if you make the target rise small enough, then there will be a high chance of making a small profit, but a small chance of making a large loss, if the price rises not quite far enough and then falls again, and doesn't recover to your target until such a long time that you'd have been better doing something else (less risky) with your money. or you can set a higher target, increasing the profit if it's hit reasonably quickly, but decreasing the probability that that will happen. but there is no obvious place for a target price where the odds are in your favour.

so far as oil shares go, is adding them now increasing your diversification? well, if you have exposure to most other sectors of shares, but not oil, then yes it is. but if you already have general funds which cover the oil sector among others, then not really.

Forgive me for still being a little confused. You say that it's the diversification between commodities futures and shares (rather than oil and shares I presume you mean) that is desirable, but if you compare plots of MFM Junior Oils and the oil futures ETF (shares vs commodities futures), they are behaving virtually identically... at least on the way down, but I'm assuming (perhaps wrongly?) that they will more or less do the same on the way up, although perhaps the futures might lag behind slightly.

http://www.trustnet.com/Tools/Charting.aspx?typeCode=O_FG5KW,XO:SPECIAL,E_FB9M4,

If that's the case then I should get the same amount of diversification and similar performance whether I pick a shares fund like Junior Oils or the ETF shouldn't I?

Only one of the assets I have in my portfolio has a significant (around 8-9% exposure to Oil), so I probably only have 2 or 3% exposure to oil total, and I am a bit overweight in that particular fund so will eventually take that down to 1-2% total (not including specialist oil funds).

Of course, if the oil is mixed in with other sectors like it is with my existing portfolio of funds, it makes it a bit difficult to efficiently rebalance and get the full benefit of holding oil together with other equities!

BrockStoker

tmsbry wrote: »

Artemis Global Energy Fund

Thanks. I'd overlooked that one, and it is available on my platform (with minimal fees) so I'm seriously considering it as an alternative.

tmsbry

BrockStoker wrote: »

Thanks. I'd overlooked that one, and it is available on my platform (with minimal fees) so I'm seriously considering it as an alternative.

Please do your own research first, I'm just a guy on the Internet.

Best of luck

grey_gym_sock

BrockStoker wrote: »

Forgive me for still being a little confused. You say that it's the diversification between commodities futures and shares (rather than oil and shares I presume you mean) that is desirable, but if you compare plots of MFM Junior Oils and the oil futures ETF (shares vs commodities futures), they are behaving virtually identically... at least on the way down, but I'm assuming (perhaps wrongly?) that they will more or less do the same on the way up, although perhaps the futures might lag behind slightly.

http://www.trustnet.com/Tools/Charting.aspx?typeCode=O_FG5KW,XO:SPECIAL,E_FB9M4

well, i wouldn't call that virtually identical ... but i would expect it to be different on the way down. suppose the oil price falls from $100 to $50 (i.e. 50%); and an oil company has production costs of $40, so it's profit margin falls from $60 to $10 (i.e. 83%); if the company's share price is roughly proportionate to its expected profits (not entirely true, but a fair place to start, i think), then it will fall more than the oil price fall. but when the oil price rises, the company's profits and share price will tend to rise more than the oil price. oil futures, OTOH, thanks to the backwardation headwind, will tend to fall more than the oil price when it falls, but rise less than the oil price when it rises.

my main point is that commodity futures (including oil futures) are dangerous, partly due to backwardation. you can be right that the oil price will rise, and yet still lose money with oil futures. i wouldn't use them as a way to back an opinion that the oil price will rise. there is some case to use a fixed % allocation to commodity futures purely to harvest their volatility - i.e. to allow you to rebalance into/out of them when they fall/rise; but since that strategy is not based on any opinion about the direction of commodity prices, it's probably better done with a diversified "basket" of commodity futures, not just oil. (and backwardation is still a drawback for that strategy. and it's not something i do myself.)

Only one of the assets I have in my portfolio has a significant (around 8-9% exposure to Oil), so I probably only have 2 or 3% exposure to oil total, and I am a bit overweight in that particular fund so will eventually take that down to 1-2% total (not including specialist oil funds).

OK, so your exposure to oil shares is low. if you want to increase it a bit now, fair enough, so long as you will at least stick with the sector if things get even worse (and optionally buy even more then - but that's not essential).

though personally, my exposure to oil shares is low, and i'm not increasing it.