How Much Are Low Oil Prices Hurting Retirement Accounts?

oil barrels

Americans are thrilled to be saving money at the gas pump. But low oil prices aren’t good news for everyone – namely, oil and gas companies.

And that affects many Americans who are invested in oil and gas companies through their retirement accounts. But how much do low oil prices really hurt retirement funds?

Dan Boyce from Inside Energy explores the question:

Oil was at $55 to $60 a barrel just before Christmas, down from a high of more than $100 per barrel this summer.

Wanting to see just how much stake the average person has in oil and gas, we found that the most direct way to get access to sensitive personal financial information was if we analyzed one of our own retirement accounts. I humbly volunteered my own T. Rowe Price Roth IRA.

It’s a meager account, containing a little more than $4,200 at this point, and analyzing it for my oil and gas holdings revealed how complex the modern retirement portfolio really is.

My $4,200 splits among 19 smaller funds, which are invested in thousands of sources. The list ranges from companies like Tootsie Roll Industries and WD-40 to countries like Norway and even World Wrestling Entertainment.

It turns out a little less than 6 percent of my IRA is directly invested in oil and gas companies, or about $243.

Scott Middleton, who works with investment consulting company Innovest, said this mirrors the national average for retirement investments in energy at somewhere between 5 to 10 percent.

It’s true for IRA accounts like mine, as well as for others like 401(k)s, 403(b)s and pension funds.

The Colorado Public Employees Retirement Association, for example, has about 7 percent of its total portfolio in the energy sector, which in Wall Street-speak basically means just oil and gas. It makes up about 9 percent of the total stock market.

Middleton said as oil prices shrink, so, too, does my $243 in oil and gas investments. And so do most of the other funds invested in the same stocks.

But Boyce offers a few qualifiers that muddy the picture of just how much falling oil prices might hurt retirement savings:

A couple of things to remember, though. For one, I’m betting on my retirement account for the long term. The account is based upon the premise that I won’t start withdrawing from it until 2055.

Short-term fluctuations in price shouldn’t really concern us. Over the long term, the energy sector has been considered a very safe investment, yielding about a 10 percent annual rate of return.

Also, while declining oil prices might be bad for one part of my portfolio, they’re good for other parts. For example, Middleton said chemical producers and transportation companies tend to do well with lower oil prices.

Ultimately, oil and gas is not a critical part of our retirement funds. But, make no mistake, our retirement funds are absolutely critical for the oil and gas industry. The American Petroleum Institute says about 70 percent of U.S. oil company worth is owned by tens of millions of U.S. households through our IRAs, our pensions and our mutual funds.

Read the whole piece here.


Photo by ezioman via Flickr CC License

Sacramento Pension CIO Talks Long-Termism and Investing in Infrastructure

talk bubbles

Chief Investment Officer Magazine interviewed Scott Chan, CIO of the Sacramento County Employees’ Retirement System, as part of its 2014 industry innovation awards series.

Some of the more interesting topics touched upon by Chan were the idea of being a long-term, “contrarian value investor” and the fund’s dive into infrastructure and energy.

Chan, on being a “contrarian value investor”:

“The price you buy something at does dictate your long-term returns,” [Chan] says. “I’ll be at pension conferences where people say they don’t think about those things—they just buy, buy, buy. We do define ourselves as long term, but that’s only part of it. We’re also contrarian value investors.” Chan spent seven years in San Francisco managing equity long/short and opportunistic hedge funds. Two years in the trenches with JP Morgan Securities’ technology equity research team came before that, as did an MBA from Duke University. Nearly a decade of living—and living off of—the “buy low, sell high” ethos made Chan uniquely unsuited to the “buy, hold, rebalance” approach so common among US public pension funds. The man can’t help but root out deals and invest to the rhythms of the business cycle.

“Take core real estate,” he says. “A lot of people view that as a ‘safe asset,’ but real estate has a lot of cyclicality risk embedded. In a full cycle, property values could go up 80% or 90%, and then back down. What you’re really getting is net operating income. The risk coming out of a depression is actually pretty low. But as the business cycle matures, and then begins to go down, every time real estate is going to have a problem. We can’t time that, but we know it will happen. Fast-forward to today, and you’re getting maybe 5.5% returns from core real estate. From how we’ve quantified the risk, there’s 25% to 45% upside for the rest of the cycle, but also 30% downside when the economy hands off from expansionary to recession. So you have to ask yourself: Are you getting paid for that risk?”

In Chan’s mind, the answer is “no.” Including real estate investment trusts, separate accounts, and limited partner stakes, the asset class accounts for 8.6% of Sacramento County’s $7.8 billion portfolio, down from 13% when Chan arrived in 2010.

Chan also talked about his fund’s investment in energy and infrastructure:

Like any good hedge fund manager, his next opportunistic play is already underway: infrastructure secondaries. In May, the institution partnered with fund-of-funds Pantheon Ventures to buy deeply discounted energy and infrastructure assets from investors who’ve had second thoughts about the highly illiquid space. In the first deal, the pension picked up two utilities—a power provider to San Francisco and a heating operation on the Marcellus Shale natural gas formation—at a 25% discount. A few months later, the general partner marked up the asset by 40%. “We’re penciling in 15% IRR [internal rate of return],” Chan says proudly, “and we’re trading cyclical risk for non-cyclical risk. When a recession comes, people still need their electricity and heating.” It’s this kind of thinking that wins Sacramento County’s CIO an Innovation Award—if not an invite to the next brunch party.

Read the full interview here.