Active funds still hold two thirds of most E&P companies

The rise of passive investment is rippling through the investment world, causing shifts in the shareholder makeup for many companies.

Investors looking to benefit from investing in an entire sector instead of a specific company, to lower fees, or to minimize their exposure to the success or failure of just one stock, are moving their capital into index funds which hold a number of companies that meet the underlying index’s requirements for inclusion.

Along with the rise of the popularity of exchange traded funds (ETFs), many of today’s headlines seem to imply that passive investing has come to totally dominate the overall investment space, crowding out institutional and private investors.

To investigate this phenomenon, EnerCom Analytics examined the holders of 25 different U.S. E&P companies over the past five years. The group consisted of eight large cap E&Ps (above $5 billion market cap), eight mid cap E&Ps ($1 billion to $5 billion), seven small cap E&Ps ($200 million – $1 billion market cap) and two micro caps (under $200 million).

Number of shares held in actively managed funds is being handed off to passive index funds

Across EnerCom’s group of 25 E&Ps, there was a universal drop in the number of shares held by active investors with a corresponding rise in those held by passive investors over the last five years. On average, oil and gas companies saw a 7% decrease in the number of shares held by active investors and a 5% increase by passive holders with the difference made up by insiders.

The trend toward passive investors has been an ongoing phenomenon, but the shift away from active management in the energy space picked up steam for all companies in the first quarter of 2016.

Passive Investment Rising in E&Ps, But Active Holders Still Dominate

Source: EnerCom Analytics

However, the majority of shares in oil and gas companies are still held by active managers, with active firms holding more than 65% of almost every E&P analyzed.

While the percent of shares outstanding held by active investors is still more than double that held by passive investors, we expect this trend to continue for the foreseeable future. Companies are seeking the sticky money being placed in passive funds, and investors are not showing any indication of moving back toward active management in a meaningful way.

Most passive holders are not sector-specific investors

Some of the largest passive holders of E&Ps are not sector-specific funds, as might be expected, but rather they are more general index funds.

The single largest passive holder of the 25 companies examined by EnerCom Analytics was the Vanguard Total Stock Market Index Fund, which held more than twice the number of shares as the largest sector-specific fund, the SPDR S&P Oil & Gas E&P ETF.

In fact, sector-specific funds only account for two of the ten largest passive holders of E&Ps, the rest are large funds that invest in slices of the overall market.

One new energy ETF with a familiar name behind it is T. Boone Pickens’ ‘The Pickens Oil Response ETF’ [ticker: BOON], which seeks to track the performance of the NYSE Pickens Oil Response Index (NYPORPR). According to the fact sheet, BOON includes the suppliers of energy “as well as companies we believe will benefit from its consumption and increasing demand/throughput. We believe this approach is more balanced and better reflects the realities of the new global energy markets in a post-shale era.”

Companies themselves don’t appear to be worried about what looks like a transition to more passive investing—as long as they are included. This growing group of passive fund investors is seen as a very attractive group to target, with BlackRock CEO Laurence Fink calling index investors: “the ultimate long-term investor.”

Legal Notice