The US shale story is already a crowded trade and will only get harder for investors from here, according to veteran value investor Bill Smead.
Speaking to Citywire Global, Smead, who is CEO and CIO of boutique Smead Capital, said the over-emphasis on the so-called ‘shale revolution’ had blinded investors to its true knock-on effect for the energy industry.
Smead, who recently launched a Ucits-version of his flagship fund named Smead US Value, said he is holding zero exposure to energy-related names as he believes the commodity cycle is cooling and shale won’t help kick-start this.
‘The question we are constantly asked by investors is why aren’t we taking part in the booming shale oil industry?’ said the Seattle-based investor.
‘They are seeing opportunities out in the shale industry, so what is happening? More and more companies are opening up in this sector to try and cash in on the projected boom.’
‘And, in that scenario, the bigger players begin to lose market share as the number of competitors doubles or grows even more so, and all the companies involved see their margins squeezed.’
While he said there could be benefits for US manufacturing, the shale companies themselves would fail to generate meaningful revenues due to the changing nature of the energy market.
He points to the volume of oil being consumed in the US, which has reduced year-on-year for almost a decade, and said this would impact further upon the price of natural gas.
‘The next seven years include much higher fuel efficiency standards, which are set by the federal government, so there is going to be less consumption. That is going to further affect the energy and resources sector,’ he said.
Diving into domestic plays
Pointing to the most recent positioning for the Smead Capital Appreciation Strategy, which is replicated for European investors as the Pareturn Smead US Value fund, Smead pointed to consumer discretionary as a more attractive bet.
In the US-registered version of the fund, Smead currently has 31.7% of the fund in discretionary consumer stocks, which compares to a 10% allocation in the S&P 500 TR index.
Smead said this bullishness was driven, in part, by a strong focus on the US economic recovery, which he sees as driving increased internal spending.
‘There is a huge demographic advantage in the US. There is a bracket of 86 million Americans who are going to be spending capital and accessing opportunities they haven’t before, such as housing.’
‘If you take housing, the number of new builds is set to rise from 700,000 units to two million, which will have a knock-on effect on US house builders and construction companies but countless ancillary industries, such as home repair and so on.’
The Smead Value Fund;Investor, the US-registered version of the fund, returned 84% in US dollars over the three years to the end of December 2013. This compares to a rise of 56.8% by the S&P 500 TR over the same time frame.