As the price of oil has collapsed over the past few months, plenty of bargains have emerged within the oil and gas sector.
However, unless youve got a huge chunk of cash to invest across the sector, its difficult to separate the wheat from the chaff and pick those companies that have the best chance of riding out the current market weakness. There are plenty of companies out there that will struggle to survive in the current environment.
As usual, the best way to minimise risk in this case is to invest across the sector. Funds are usually the most cost effective and efficient way of achieving this diversification.
A risky pick
Right at the top of the pile and the most risky play isMFM Junior Oils Trust.The fund only has 22m in assets under management, so its one of the smallest trusts out there and its portfolio is full of high-risk, high-reward plays on the oil industry. MFMs largest holding isFAR Limited,an Australian explorer with a portfolio of exploration licences across Africa.
However, the Junior Oils trust has a poor performance record. Over the past five years the trust has returned -25% excluding fees. The total expense ratio is 1.88% per annum and the trust offers no dividend.
A larger, more diversified play on the sector is theBlackRock Commodities Income Investment Trust. With assets under management of 104m, the income investment trust is four times the size of the Junior Oils trust and supports a 5.9% dividend yield at present. The top three holdings, which make up 18.6% of the portfolio, are two oil majors,ChevronandExxonMobil, and the worlds largest miner,BHP Billiton.
Moving up in size, with 151m of assets under management,Investec Global Energyoffers an alternative play on the energy sector. Global Energys largest holding is Suncor Energy, a Canadian oil sands producer, which accounts for 5% of the fund. A dividend yield of 0.46% is offered and the total expense ratio is 1.62% per annum.
With just under half-a-billion pounds in assets under management,First State Global Resourcesis the second largest fund Im looking at, and is more orientated towards non-oil commodities. The funds top three holdings, accounting for 26% of assets under management, are BHP,Rio Tintoand ExxonMobil. The total annual expense ratio is 1.54% and a dividend yield of 0.53% is offered.
And finally, a fund that may not be accessible to all investor,s but is still appealing nonetheless. TheBlackRock Global Funds World Energyfund is an offshore fund, which requires a minimum initial investment of 5,000. The fund has just under 1.3bn in assets under management. Around 30% of these assets are invested in oil majors Chevron, Royal Dutch Shell and Exxon.
Don’t limit yourself
Oil and gas producers may look like bargains right now, but the oil market is unpredictable and it could be some time before the price of oil recovers. With this in mind, its best to broaden your exposure and look to other sectors top provide growth while the oil market languishes.
Dividends are the key to long-term wealth creation and can help accelerate you’re portfolio’s growth.The Motley Fool is well aware of how powerful dividends are and to help you pick the companies with the best payout potential, we’ve put together this free guide entitled“How To Create Dividends For Life”.
The report is simpleand easy to understand. What’s more, the report comes with no further obligation.
Click hereto download your free copy today!
Rupert Hargreaves owns shares of Chevron. The Motley Fool UK has recommended Chevron. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.