Fund Manager Focus by Ellie Duncan

Angelos Damaskos launched the Junior Oils Trust in 2004 in the belief that a commodities ‘super-cycle’ was imminent. The fund’s objective is to invest in small and mid-market oil exploration and production companies.

The trust invests in companies that have identified wells already in production, or those with a growing production profile. ‘In addition, we make sure that the management team has not only a long track record in the sector but, most importantly, specific-expertise in the areas of operation,’ says Damaskos. ‘Finally, we like companies with an active exploration programme so that exploration risk is protected by ongoing operations.’

The FTSE 350 Oil & Gas Index acts as a general benchmark but Damaskos says the fund does not track it closely as the index contains large-caps, including Shell and BP. The trust’s net asset value soared from £3.7 million at launch to more than £17 million by June 2006.

On the defensive

The fund’s performance has suffered recently as the market shies away from exploration and development prospects among small-caps, observes Damaskos.

In the past year, the Junior Oils Trust lost investors £300 for every £1,000 invested on a total return, offer-to-bid basis, according to FE Analytics. It has fared slightly better over the longer term, though, making a £495 profit for investors in the past three years, and a modest £39 profit for investors over five years.

‘In times of falling markets and increased volatility, investors generally want to be out of small-caps, which are less liquid, for fear of not being able to sell if they need to,’ says Damaskos.

The market volatility prompted Damaskos to adopt a more defensive stance at the start of the year. In January, the fund held about 30 per cent in cash, which he acknowledges is very cautious. He also chose to invest in cash-rich companies and bonds, with the aim of minimising volatility.

Stock picks

The top ten holdings in the portfolio account for 46.3 per cent of the fund, while the top 20 holdings total 73.1 per cent.

The trust’s largest holding is in Australia-based Cooper Energy, which accounts for 7.2 per cent of the fund’s weighting. Damaskos bought into the upstream oil and gas exploration and production company in March this year. Its primary asset is the Cooper Basin of Australia, where it is growing production, but it also has assets in Indonesia, Australia and Europe.

He expects the company to find further success offshore Tunisia, where it has discovered significant reserves and plans to drill a couple of wells in order to confirm the viability of the deposit.

Stocks are held in the fund over the medium to long term and there are some positions that have been in the portfolio since its inception. Damaskos says that he looks for companies with cheap reserves in comparison to their market cap.

Mid-cap Parex Resources is the portfolio’s third-largest holding, with a 6 per cent weighting, and provides the fund with significant liquidity, according to Damaskos. The Canadian-headquartered company has prospects in the Llanos Basin of Colombia and onshore Trinidad and Tobago.

More importantly, it has been able to discover new reserves, which he believes have not yet been factored into the company’s valuation, currently around $60 per barrel.

It’s a rapidly growing business in a highly prospective area of the world where they have the potential to identify much larger reserves in the future.’

Damaskos claims that the oil sector is looking attractive again and says that it is unlikely that the Brent Crude oil price will slip below $100 next year.

He is pleased with the fund’s performance over the past seven years and adds, ‘It has the capacity to outperform when the market is stable and in recovery mode. But naturally the trust has more volatility than other funds because of the sector it is focused on.’