Oil & Gas Over-Concentration
- What is Wrong With Oil & Gas Sector Over-Concentration?
- Do Industry Rules Permit Sector Over-Concentration?
- How Has the Oil and Gas Sector Performed Over the Past 10 Years?
Although the oil and gas sector has outperformed stock and bond index in many years, no investors’ interests are served by putting all their eggs in one basket.
Sector concentration is generally a risky strategy. Suitability rules require that a broker or investment advisor recommend investments that are consistent with the investors’ investment objectives and risk tolerance. The failure to adhere to sector diversification would be by definition unbalanced.
While the energy sector has outperformed other sectors in some years, the Dow Jones U.S. Oil & Gas Index has had a negative return for over the past 10 years.
Maintaining a diverse portfolio is one of the most basic principles of prudent investing. Unfortunately, when the oil and gas sectors were booming in recent years, many unscrupulous brokers and advisors encouraged an overconcentration of investments in this one area. Eventually those sectors went into decline, and investors experienced out-sized losses exactly because of this overconcentration. This is an example of improper behavior on the part of the brokers and advisors because as fiduciaries, brokers and advisors are required to put their client’s financial best interests first and foremost. This means avoiding unnecessary risks and advocating for a diversified portfolio. Overconcentration, whether in energy and gas or in any other sector, is a fundamentally risky investment strategy and may also be a breach of the responsibilities legally required of a fiduciary.
Some brokers and advisors will try to justify their reliance on overconcentration by pointing to the stratospheric gains in the oil and gas sectors. But even if there was money to be made, a strategy based around overconcentration is inherently unbalanced. No investor’s interests are served by putting all their eggs in one basket. That means not only investing in multiple companies, but also in multiple sectors.
Over recent years, the benefits of investing in Master Limited Partnerships [MLPs] in the energy sector were touted to many low risk investors including retirees. The MLP investments were often made through IRA accounts, which may have been unable to realize the tax and other benefits promoted by the MLP salesmen.
While the initial rate of return may have been attractive, other features of these MLPs relied on the continuation of high prices in the energy sector, which fluctuated radially.
To help us evaluate your chances for a successful recovery for an “Overconcentration in Oil and Gas” we offer a free and confidential claim evaluation.