Adviser Jim Ehrenkrook believes that investing in oil and gas is crucial to clients' portfolio performance. After all, he said, the oil and gas industry underpins the U.S. and global economies.
“Fossil fuels are a part of the economy,” said Mr. Ehrenkrook, president of Heritage Financial Group Inc., which is affiliated with Commonwealth Financial Network and has $29 million in assets under management. “No matter how much the greens want to change it, we are a fossil-fuel-based economy and we will be for a long, long time. Other than nuclear, I'm not aware of alternative fuels that are cost-effective.”
“If [oil and gas are] one of the underlying items that fuels the economy, it seems logical to place some money [there],” he said. Oil and gas typically amounts to between 5% and 15% of a client's holdings, even though some clients have no exposure to the sector.
As of July 19, the S&P/TSX Equal Weight Oil and Gas Index was down 0.58% for the year. For the same period, the S&P 500 was up 5.49%.
Mr. Ehrenkrook uses two methods to invest clients in the oil and gas sector: a series of private placements that he has used for almost 20 years and three sector mutual funds.
For accredited investors, he recommends limited partnerships sponsored by Mewbourne Oil Co., an oil and natural gas producer in West Texas and Oklahoma. For the less affluent, he recommends three mutual funds:
Invesco Energy A Ticker:(IENAX), Vanguard Energy Inv Ticker:(VGENX) and Icon Energy S Ticker:(ICENX).
The use of Mewbourne private placements fits into Mr. Ehrenkrook's overall investment philosophy, which emphasizes nonliquid investments. He uses other illiquid assets such as nontraded real estate investment trusts to diversify clients' holdings away from the volatility of publicly traded companies.
The strategy serves both to diversify a client's holdings and to improve portfolio performance, he said. “I go way against the grain of most advisers,” said Mr. Ehrenkrook, 64, who cut his teeth on alternative investments during the limited-partnership, tax shelter debacle of the 1980s. He then used that knowledge to invest in real estate sold in the 1990s by the Resolution Trust Corp. for pennies on the dollar.
“It's the difference between the volatility of market-traded investments and the stability of nontraded investments,” he said. “Anything that's market traded, like a market-traded
REIT — it's going to have market movement. When the stock market dropped a few years ago, the value of real estate mutual funds dropped, even though the value of the actual real estate remained relatively stable.”
On the flip side, there are perils to investing in nontraded, illiquid investments, Mr. Ehrenkrook said. For example, an investor could put money into an oil and gas limited partnership whose wells come up dry.
That means the adviser needs to detail the risks clearly, as well as rely on his or her firm's due diligence when selecting investments. In fact, Mr. Ehrenkrook said, he has left broker-dealers in order to follow due-diligence analysts to a new firm. “Nontraded investments have to be explained, and the client must know it's not liquid. And they have to know exactly what's going on. And I have to have confidence in the due-diligence people in the firm.”
“It's like dancing with a gorilla,” he said. “You're not done dancing until the gorilla is done. So you better know your gorilla.”
Email Bruce Kelly at [email protected]
