Rising oil has advisors adjusting energy allocations

Tom Graff of Facet and Cyrus Amini of Helium Advisors

Portfolio manager recommends 70/30 split between traditional and alternative energy over next few decades.

Advisors ignoring the rise in crude oil may be missing out on a gusher of profits for their clients.

A barrel of US crude for April delivery cost $81.64 at last check, up 13.7 percent year-to-date and up 22 percent over the past 12 months. That’s a pretty slick return for the black gooey stuff, but it’s been a pretty stealthy rise, especially considering all the attention being paid to the bull runs in other markets.

For example, the S&P 500 is up 9 percent by comparison and the tech-heavy QQQ ETF has risen 9.3 percent since the start of the year. Meanwhile, gold, which everybody is going gaga over, has returned 4.7 percent so far in 2024. A shiny return for the yellow metal for sure, yet still 9 percentage points below that of “black gold.”

Meanwhile, alternative, or so-called clean energy, stocks, have had a rougher time out of the gate in 2024. The iShares Global Clean Energy ETF (ICLN), which holds a number of solar stocks, is down 12.6 percent so far this year.

While the year is still young and this trend could change (and most likely will), Tyler Rosenlicht, portfolio manager at Cohen & Steers, said over the long term, the energy transition from traditional to alternative sources will take longer than expected. In the meantime, during periods of economic strength like the one the US is currently experiencing, the demand for traditional energy, such as oil and natural gas, will remain on the rise.

“There’s lots of investment in renewables, and we think that’s great and a great investment opportunity. But we’re also going to rely on traditional forms of energy for a really long time,” he said. “So as we think about the energy transition, we do think there’s a transition in market share, but it’s really more of an energy addition story.”

Rosenlicht recommends investors split their energy allocations between 70 percent traditional and 30 percent alternative for the next few decades.

“It’s not an either-or world,” he said. “You need to have some balance of both, and there’s going to be great opportunities within both constituencies.”

FINDING THE RIGHT BALANCE

Cyrus Amini, chief investment officer at Helium Advisors, says he invests in renewable energy through a small number of private strategies focused on small-to-midsize solar and wind projects in the US.

“We’ve avoided the mainstream ESG vehicles as they are less concentrated on the infrastructure and strategic needs of the sector,” he said.

With respect to traditional energy, or fossil fuels, Amini maintains exposure via the broader US equity indices and actively monitors the midstream space for potential yield opportunities.

“Fossil fuels aren’t dead, and renewables can’t take on the full energy needs of the developed world just yet,” he said. “A balance between the two is necessary in the years ahead.”

Tom Graff, chief investment officer at Facet, currently maintains an underweight position in the energy sector when it comes to the public markets.

“There’s a lot of energy infrastructure investment going on right now, which could be good for some companies, but it risks more supply and therefore lower commodity prices for others,” said Graff, who also has significant concerns about Chinese energy demand.

“China tends to have an outsized influence on commodity prices, and if that economy continues to struggle, especially in the construction sector, demand for commodities could wane,” he said.

Nathan Wallace, principal wealth manager at Savvy Advisors, believes that as an advisor, his job is to think about “the next three months in the markets as well as the next 30 years.” As a result, he is investing in both alternative and traditional energy.

“While it is clear that global economies are serious about transitioning away from fossil fuels, this transition will take decades to come to fruition,” he said.

“From an investment perspective, oil and gas offer interesting near-term opportunities, and alternative energy sources offer exciting longer-term investment opportunities,” Wallace said. “By investing in both sources, I am able to balance the returns of our current energy landscape with the bright future of alternative energy production for my clients.”

While gold is often seen as the go-to commodity for hedging against market uncertainty, Steve Stanganelli, certified financial planner at Clear View Wealth Advisors, believes there are plenty of other opportunities that offer a volatility hedge and even provide income. This is why he favors options-based buffer ETFs combined with a broad-based commodities ETF like Direxion Auspice Broad Commodity ETF (COM).

“I think energy stocks are reflecting the continuing strength in the economy,” Stanganelli said. “So a broad-based commodity fund includes oil exposure. On top of this, I add exposure to oil infrastructure with pipeline operators. Regardless of oil’s prospects, an investor gets paid a sweet yield for moving sweet crude. I tend to favor Alerian MLP ETD (AMLP) for this, which is outpacing oil and paying about 7%.”