Fidelity’s Matt Siddle has shifted to an overweight stance on oil and energy stocks in his blockbuster European equity fund.
The Citywire + rated manager revealed the change in an investor update for the €533 million Fidelity Funds – European Larger Companies fund.
Siddle, who also runs the Fidelity Funds – European Growth fund, said he had opted to tactically adjust his energy sector exposure following the significant slump in oil prices at the end of 2014.
‘If you look at all of the sectors apart from oil and gas, there is a clear correlation between the more debt you have, the higher your dividend yield. The stronger your balance sheet, the lower your dividend yield,’ Siddle said.
‘Oil & gas stands out compared to the other sectors, not just having a high dividend yield but also a high dividend yield compared to its balance sheet strength.’
Siddle said this strength saw him increase exposure in oil stocks from a 0.6 percentage point underweight at the end of the third quarter to a 0.1 percentage point overweight at the end of the year. In addition, he said there was scope for further additions.
‘The price-to-book value for large cap energy stocks relative to the market shows massive de-ratings and the price-to-book compared to the rest of the market is now at its cheapest level for around 60 years. That clearly indicates that the valuations of these stocks are very depressed.’
Siddle said he had increased exposure to Norwegian giant Statoil to capitalise on the weakness, while selling out of BP and reducing exposure to French group Total. In addition, he bought into Nordic banking group DNB NOR.
‘Our shift has come by shifting some of the mining exposure into the energy names. This is as well as an opportunity in DNB NOR, which has de-rated significantly over the past few months, this is despite not being directly impacted by the lower oil price,’ he said.
‘While oil prices are depressed currently and have the potential to move slower in the short term. The natural decline rates of oil means over the next two or three years it is very likely that the oil price will move back up towards the incentive price and that will provide an opportunity for some of the very cheap, high yielding energy stocks.
‘Not to say I am chasing low-quality business. It is not time to chase after any low quality cyclicals, it is finding good quality businesses which have de-rated despite having strong balance sheets and fundamentals.’
The Fidelity Funds – European Larger Companies fund has returned 55.3% in euro terms over the three years to the end of December 2014. This is while its benchmark, the FTSE World Europe TR EUR, rose 53.2% over the same timeframe.