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Get the Edge on Oil

DSP BlackRock has unveiled an NFO that will work on demand-supply mismatch

Worried about high oil prices? Here’s a fund that could help you make money off them. DSP BlackRock’s World Energy Fund is essentially a play on the global oil crisis. If oil prices rise, this fund will do well. Of course, such a fund has to invest in foreign energy stocks. In India, the government’s administered oil price regime has turned the normal economics of oil companies upside down. Here, oil companies lose money when crude prices rise, unlike the rest of the world where high oil prices mean higher profits.

The DSPBR World Energy Fund is a fund of funds (FoF). It will invest in two funds run by BlackRock Global Funds, the BGF World Energy Fund (WEF) and the BGF New Energy Fund (NEF). While the former invests in conventional oil and energy, the latter paints this whole thing a shade of green by concentrating on new, unconventional and renewable energy businesses. The green fund can be from zero to 30 per cent of the Indian fund’s portfolio while the other fund will be 50 to 100 per cent. Both funds were launched in April 2001.

The Underlying Schemes
The fund manager is Vinit Sambre, but he will only decide the allocation between the two underlying funds. Those are to be managed by Robin Batchelor and Poppy Allonby. For the record, WEF’s mandate lies mostly in companies engaged in exploration, development, production and distribution of energy while NEF invests in new energy technologies, renewable and alternative energy.

Batchelor, who holds M. Sc. (Investment Analysis), is a member of BlackRock's Natural Resources Equity team. He began his career with Merrill Lynch as an analyst. Allonby, a CFA, joined MLIM in 2000. Prior to joining the Natural Resources Team, Allonby was responsible for basic materials, utilities and energy sectors for the US team.

Suitability and Recommendation
The case for investing in the fund is predicated on the world economy recovering, an increasing mismatch between oil demand and supply and oil prices remaining strong and the market for alternative energy growing. These are all likely in the medium-term and long-term although the short-term is uncertain.

Globally, valuations of oil companies are hitting historic lows. Oil being central to an economy’s growth, the developing economies will fuel the demand for oil in a situation where supplies will be under pressure due to reduced rate of new oilfield discoveries. As the gap between demand and supply rises, the prices will shoot up forcing the governments to aggressively look for alternative energy sources.

Investors can benefit from the fund in a rising oil prices scenario. Owing to the high correlation between oil prices, inflation and trade & fiscal deficit, the fund can act as a portfolio hedge.

On the negative side, the underlying funds had been unable to match the performance of the diversified equity funds in India as of May 2009. Secondly, there will be an exchange risk involved as the returns will be negatively correlated with the domestic currency’s valuations against the US dollar. Further, on the taxation side, the investments in equity FoFs are taxed as per the debt funds, loosing out against domestic equity funds.

This is a unique fund and it will add significant value as a hedge against rising oil prices. A limited exposure of 5 – 10 per cent to this fund can add to sector and geographical diversification to a portfolio, not to speak of acting as a personal hedge against the money you shell out at the petrol pump.

Basic Details
Type: Open-End Equity Fund of Funds (FoF)
NFO Opens: July 10, 2009
NFO Closes: July 31, 2009
Plan / Options: Regular and Institutional plans each with Growth and Dividend (Payout and Reinvestment) options.

Minimum Application Amount:
Regular Plan: Rs. 5,000/-
Institutional Plan: Rs 5 crore
Minimum Additional Purchase: Rs 1,000/-
SIP Facility: Minimum 12 installments of Rs. 1,000/- each.

Benchmark:
MSCI World Energy (Net): 70 per cent
MSCI World (Net): 30 per cent

Fund Manager: Vinit Sambre (B. Com., FCA)

Load Structure (During NFO):
Regular Plan
Entry Load: For investments of less than Rs 5 crore, 2.25 per cent.
Exit Load: 1 per cent for redemptions / switch-outs before 6 months; 0.50 per cent for redemptions / switch-outs between 6 months and 12 months.
Institutional Plan: NIL
Annual Recurring Expense (maximum): 0.75 per cent (including Investment Management fee of 0.25 per cent).