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Energy run

A new open-ended fund aims to capitalise on global opportunities in the energy sector

The mutual fund industry has come out with several new fund offers. One such is the DSP BlackRock World Energy Fund, which is open for subscription till July 31.

This is an open-ended fund, focused on the energy sector. Moreover, it’s a feeder fund. This means that it will invest all its money overseas into two international funds: the BlackRock Global Funds (BGF)-World Energy Fund and the BlackRock Global Funds-New Energy Fund.

The BGF-World Energy Fund invests in conventional oil companies like Chevron Corp and Royal Dutch Shell. The BGF-New Energy Fund invests in companies dealing in alternative energy.

DSPBR actually conceived the new fund when it launched its DSPBR Natural Resources and New Energy Fund in 2008, says Anup Maheshwari, head of equities, DSP BlackRock Mutual Fund. This older fund invests in domestic energy and natural resources companies and it also invests up to 35 per cent of its portfolio in the two international BGF funds.

“At that time, based on our feedback, we realised that it made sense to carve out that 35 per cent into a standalone fund,” says Maheshwari. The subsequent global meltdown delayed things but he believes that now is “as good a time as any” for the new offer, as he believes in the underlying opportunities in the energy sector. “For any feeder fund, we keep three points in mind,” he says. One is whether there’s a sustainable theme. Two, if there’s portfolio diversification for local investors. And the third is the return potential.

“Oil equity valuations are down to 15 year lows and oil prices are down too so it makes it interesting from here on,” says Maheshwari. Yes, the international funds have under-performed over the last year as “commodities got decimated”, but he says: “To my mind, that’s an opportunity.” After all, the underlying demand-supply dynamics are favourable. “In oil as in gold, we see supply declining in the long run as it’s getting tougher to discover and produce oil,” he says.

The mutual fund is also betting on the growing opportunity for alternative energy companies. “It’s the only sector where governments around the world are mandating growth,” says Maheshwari. The proposed fund will invest up to 30 per cent of its portfolio in the BGF-New Energy Fund.

“It’s not a bad idea because some amount of diversification is always good,” says Kartik Jhaveri, director, Transcend Consulting India. But he cautions: “In areas like energy, power and infrastructure, we know that it can turn out to be a goldmine. But you may have to wait for a long time.”

Remember too, the currency risks of investing in overseas funds. “If the rupee appreciates against the dollar, investors will lose but we believe that that will be partly nullified because crude moves inversely to the dollar,” says Maheshwari.

Financial advisors believe that at the most, investors could invest 2 to 5 per cent of their portfolio in a new fund like this. Jhaveri says: “You may benefit more from the energy sector if you looked at mid-cap and small-cap stocks through a diversified fund.”

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