The Allocators’ View: Energy Investing
Jagdeep Singh Bachher and Amy Myers Jaffe of the University of California argue that allocators should acknowledge structural energy market changes — and move beyond traditional middlemen.
By Jagdeep Singh Bachher and Amy Myers Jaffe
In recent years institutional investors have dominated the flow of funds into commodity-related investments. It’s easy to see why: During their super-cycle of the 2000s, commodities — especially oil — were an endless glass of return. Pension funds, especially, placed big bets on oil and gas real assets, goosing up overall return for a decade and propelling what became the giant — albeit highly leveraged — shale industry in the U.S.
Then, in 2015, gravity hit.
Portfolio managers are now painfully writing down losses from prior oil and gas buying sprees, with caveats in their board reporting that oil is a cyclical industry and therefore valuation might recover. Indeed, it is never a good idea to bet against cyclicality or volatility in oil, and late last year a production cut deal by OPEC brought some relief to the sector. But regardless of whether the Trump administration makes good on its promise to cancel what it labels job-killing climate-change policies, investors would be wise to reevaluate why they hold oil and gas assets in the first place — and whether those reasons are still valid.