Greg Gipson has significantly broadened the geographic exposure in the BMO Global Energy Class A mandate since taking over the fund in March 2017.
"Prior to our taking over management," says Gipson, a managing director and portfolio manager at BMO Global Asset Management in Toronto, "this fund was more Canadian focused; it was roughly 90% Canadian, 10% non-Canadian. We moved it to have a bit more of a global feel, so it's the other way around, 10% Canada and 90% non-Canada."
The global universe from which Gipson draws ideas includes more than 325 companies of all market capitalizations, located in the developed markets. There is no emerging market exposure in the fund and no Middle-East direct exposure. The portfolio is currently weighted approximately 24% in large-cap names exceeding $100-billion. Gipson describes the style of the fund as neither growth nor value, but rather as a balance between the two.
The predominantly bottom-up strategy of the Morningstar 4-star rated portfolio looks for 60 to 80 high-quality companies that are consistently able to generate free cash flow and grow production on a quarterly basis, and that will generally outperform their category peers over time.
The team of three managers, including Gipson complements its own research with the expertise of analysts, specifically Jennifer So, a BMO analyst who specializes in Canadian energy equities.
The portfolio includes a mix of energy subsectors, including exploration, production, refining, services and pipelines. Currently, given the momentum that oil has had, the team has allocated a bit more to exploration and production (E&P).
Six months ago, Gipson says that he and his team heavily favoured oil refiners given the attractive level of refining margins. "We have reduced that slightly and increased our exposure to E&P as oil has continued its upward trajectory. Our goal was to better capitalize on their beta to the commodity price."
Over the last quarter or so, in a more favourable trading environment, Gipson says the team has allocated more capital into Canada and more into large-cap names, such as the larger integrated names like Alberta-based 
Suncor Energy (SU), among the top 10 holdings.
"Suncor would be our top pick in Canada," says Gipson. "It really ticks the boxes that we look at, with strong growth and strong free cash flow that energy companies have been able to do, in particular Canada, over the last few years." In addition, Gipson says that Suncor has really improved its price controls, bringing down the company's average cost, or break-even position.
U.S.-based Valero Energy (VLO), among the top-10 holdings, illustrates the investment philosophy for good, strong companies. "We like the refinery space," says Gipson, "and Valero also has a very attractive return on capital to shareholders."
Looking elsewhere for opportunities, Norwegian-based TGS-NOPEC Geophysical -- also among the top 10 holdings -- provides geoscientific data to the oil and gas industry. "We are cautious given strong price action," says Gipson, "but [the company is] attractive on sales and earnings growth and free cash-flow yield. We are maintaining our position in TGS given its attractive fundamentals."
To mitigate risk in the cyclical energy space, the managers focus on having a well-diversified, liquid, global, investible pool of assets to choose from. As well, portions of the fund may include exchange-traded funds. "That tends to reduce the specific risk of the fund," says Gipson.
Historically, the criteria for stocks in the energy area have included metrics such as recycle ratios, production growth and reserve growth. "What we've found though," says Gipson, "over the last few years where there's been a material uptick on the supply side, is that a variety of metrics focused on more cash flow have actually been working out quite well."
The fund is currently weighted around 46% in U.S. equities and 41% in international equities, with the remainder in Canadian equities and cash. Cash usually represents less than 5% of the portfolio. According to Gipson, in general, the mandate will have 50% to 60% of the fund invested in North America, with the majority in the U.S., and the balance in Europe and Asia.
Reflecting on the skittishness of investors who have "seemingly written off the energy sector, whether it be too volatile or too difficult to assess," says Gipson, he thinks that investors sometimes focus quite a bit on the actual price of oil, where it's trading, rather than looking at the trends and the underlying fundamentals and dynamics that are driving the price.
"We continue to view valuations favourably," says Gipson. "Though the price of oil has been volatile at times, company fundamentals remain strong. What we've seen is a catch-up in the energy space, at least the companies we look at, reflective as to where the price of oil is now."
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