The Fund Manager: High-octane work puts power in oil and gas investment

Tim Guinness has had a long and varied City career managing funds and fund management groups. But he came into fund management relatively late, having started his career in corporate finance.

"I read engineering at Cambridge and I decided to prolong my education for a couple of years by going to the Sloan School at the Massachusetts Institute of Technology. I was hired by Barings, who were looking for a US business school-trained graduate and I spent seven very happy years there in corporate finance. In 1977, when I had turned 30, I felt I wanted to see a bit more of the world, so I joined Guinness Mahon, who were building a corporate finance team. I had two years as head of corporate finance before I went to run the banking side."

This also brought Mr Guinness into contact with the group's investment management operation. "That department was a bit of a backwater and could do with shaking up. The board said, 'Why don't you go and run it'. So, at 34, I became involved with investment management for the first time." This was the early Eighties, when fund management was still firmly focused on the UK market, but Mr Guinness saw the opportunity to broaden its scope. "I had an idea to build up an international business, investing in currencies and bonds, as well as equities, and our initial success was with currency funds," he says.

The fund management business that developed from this idea was Guinness Flight, run with another experienced fund manager, Howard Flight (now Conservative MP for Arundel and South Downs). Mr Guinness's chance to run some of the funds himself came when his group launched a range of equity funds. "In 1985, we wanted to build up the equity side of the business and I ran our international equity fund for several years, and subsequently our UK equity fund, but by 1992 the business was growing very rapidly and I had to devote more time to managing the business."

Guinness Flight was acquired by South African-based manager Investec in 1998 and Mr Guinness' role changed again. "When we agreed to the Investec takeover, we also agreed that their management would run the merged company and that Howard Flight and I would be joint chairmen. But I realised that after six or nine months they would be nodding politely at my advice and then getting on with running the company, so I was looking for something to make me want to come into the office every day." The solution was a sector specialist fund largely forgotten by the rest of the group.

"I had spotted that we had the GF Energy Fund, an 'orphan' that probably would have been closed so I said I would run it." Now renamed the Investec GSF Global Energy Fund (part of the group's offshore Global Strategy Funds range), Mr Guinness' strategy is to offer investors a broad exposure to the energy sector, mainly focusing on oil and gas. "The fund invests in international equities, companies in oil and gas exploration and production or in integrated oil companies, which also gives it exposure to the equipment and services sector of the oil market. "By inclination, I am a value investor, looking for growth at the right price. For example, the median p/e ratio of the stocks in my fund is 9.75, and the main market average is between 23 and 25.

"I am happy to be a contrarian, but you have to know why you own what you do and there's no substitute for elbow grease: you have to do the research. I also believe in having an investment discipline to look at stocks that move up or down by 20 per cent and ask whetherreasons for holding them are still valid." Geographical exposure is predominantly towards North America, with just under half of the portfolio invested in the US, 20 per cent in the UK and a further 12 per cent in Canada and Australia. The remainder is invested in Europe. This means the fund holds a broad variety of companies, despite its specific investment focus. "I have a pipeline company in the portfolio and a pure refining company, and I can also invest in utilities and in alternative energy companies, although I haven't got any of either. But it means that, over time, there will be three elements to the portfolio – oil stocks linked to the oil price, utilities, which are correlated with the wider stock market, and alternative energy, a new and exciting growth area."

Like many sector specialist funds, Investec GSF Global Energy is relatively small at £10m, which means a small number of holdings. This suits Mr Guinness' investment style. "I have always believed in trying to run concentrated portfolios, and this fund has between 22 and 27 stocks. There are 22 today and all bar one have market caps of $1bn (£700m) or more. I allow myself up to three small-caps in the portfolio, but at the moment there is only one.

"I try to recognise trends that are going to move stock prices before the market discovers them. For example, one reason I wanted to take on the fund was that I could see the oil price was on its back and the sector was bound to recover. With hindsight, I realise that February 1999 was a turning point, the end of an 18-year bear market in oil, as Opec has got back its confidence in how to manage the oil market. The Asian crisis has now receded and over the next 10 years, Asian consumption of oil will double. At the same time, US and European production has peaked and is starting to fall.

"In these circumstances, oil services companies are a great play because they are heavily leveraged to any rise in the sector. The market was not realising there had been a fundamental change in the oil market and the new floor for the oil price was $25 not $17 and that was good for oil service stocks; $25 is not really a high oil price – nor is $30."

FUNDAMENTAL FACTS

Fund manager: Tim Guinness

Age: 54

Fund: Investec GSF Global Energy

Size of fund: £10.58m

Fund launched: January 1985

Manager of fund: Since January 1999

Current yield: 0.63%

Initial charge: 5.00%

Annual charge: 1.00%

Current bid/offer spread: 5.84%

Minimum investment: £2,000 (subsequently £500)

Minimum monthly savings: £150

Standard & Poor's Rating (maximum *****): n/a (insufficient comparable funds)

Fund performance to 8 June 2001 (offer-to-bid, with net income reinvested)

One year 30.25%

Two years 69.84%

Three years 75.32%

Five years 128.47%

Seven years 202.66%

10 years 249.28%

Source: Standard & Poor's