Is it too late to get into energy, what with oil prices approaching $75 per barrel and natural gas at nearly $8? No, according to several institutional investors who spoke at a recent program at Southern Methodist University's Cox School of Business in Dallas.

Energy makes sense because it provides a differentiated return from other asset classes and is a key global industry. What's more, there are many ways to get exposure to it, from public equities and bonds to private-equity or venture-capital formats, they said.

"Energy is in all the sectors you may already be invested in anyway. If you're in the S&P 500, you're in energy. If you don't think so, you're misled," said Mark Bernard, managing director of the Howard Hughes Medical Institute.

The $18.5-billion endowment has no sources of new funding for its $600 million in annual expenses to support biomedical research, except from its investment earnings.

It has invested in energy since 1986, with about 16% of the portfolio currently in energy or energy-related investments. About 20% of the portfolio is in high-risk, high-reward areas, such as emerging markets and private equity, and 20% is in bonds. Some 35% is in global diversified equities and 25% is in hedged equity, real assets, such as real estate, and distressed or credit-sensitive ideas, Bernard said.

From October 1996 through September 2006, oil and gas investments in the portfolio have far out-performed other investments and other benchmarks such as the Russell 3000.

Is it too late? "The question is, what is the new mean? If you believe that the question implies a reversion back to the mean of $25 to $30 a barrel, then maybe energy isn't right for you, but I think we have a new and higher mean, because of India and China. The long-term fundamentals look strong," he said.

Agreeing with that assessment was Margot Wirth of CalSTRS-the $170-billion California State Teachers Retirement System fund, the nation's second-largest public employee pension fund. Some $1.73 billion is in energy. Most of that is invested with recognized private-equity managers, such as EnCap Investments LP, First Reserve and Energy Spectrum Partners.

"When it comes to the energy sector, we do like diversification," she said. CalSTRS decides on its investments with these criteria: 30% based on past performance, 25% on whether the interests are aligned between the general partner and the limited partners, 20% on continuity and history of the management teams, 15% on investment strategy and pace of investing and exiting, and 10% if it's a strategic fit with the rest of the portfolio.

Both investors said they prefer to invest with fund managers who have seen all the cycles, or who have a track record from being together at a previous company.

Comments