Increasingly short-sighted investors face the very real risk of failing to capitalise on the future strength of the American energy sector, Euro Stars AA-rated manager Fred Fromm has warned.
Fromm, who co-runs the $360 million Franklin Natural Resources fund with Matt Adams and Stephen Land, told Citywire Global investors have become overly cautious due to concerns over the macroeconomic impact on the energy sector.
While Fromm acknowledged the US shale oil and gas story will take a number of years to play out, he said current concerns could lead to investors narrowing their investment horizons too sharply.
‘What is interesting, and I chalk it down to the environment we have been in for a number of years, is investors have clearly been ignoring it. Because of the uncertainty and the volatility in the market, a lot of investors’ horizons have shortened considerably.’
‘Investors are not willing to look out to a year in the future or two years even. This is at a time when we have companies announcing plans for liquefied natural gas plants which won’t even come on line until 2018.’
Fromm said there are a number of questions still to answer with regards to the future of shale gas but he offered a bullish outlook on the sector as a whole.
‘There are still a lot of questions, such as the exports or permits issue and also, if they cannot export, will it be used in domestic chemical plants to manufacture ethylene. This would give the chemicals industry a massive competitive advantage.’
‘But, because investors have become so short-sighted and their horizons have shortened so much, will they be able to look beyond a few years ahead and actually see that, given the environment, there aren’t that many obstacles to it becoming a major factor in power generation?’
Fromm, who is primarily invested in the US market and has 75% of his fund in energy names, said the shale gas – or natural gas – story is improving following a difficult 2012. Oversupply concerns had led to some commodities specialists shorting the sector.
‘The sector is primed to get better from a couple stand points, as companies are not currently buying new equipment because they are worried about getting a return on it.'
'Also, they had exhausted their budgets by the third quarter of this year but will be getting new budgets for 2013,’ said Fromm.
The Franklin Natural Resources fund has returned 32.66% over the past three years. This compares to its Citywire benchmark, the FTSE AW/Oil & Gas TR, which rose 32.58% over the same period.