The high-performing fund manager Wilson Asset Management (WAM) has recently identified some ASX shares that it owns (or owned) in one of its leading portfolios.
WAM operates several listed investment companies (LICs). Two of those LICs are WAM Capital Limited (ASX: WAM) and WAM Research Limited (ASX: WAX).
There's also one called WAM Leaders Ltd (ASX: WLE) which looks at the larger businesses on the ASX.
WAM says WAM Leaders actively invests in the highest quality Australian companies.
The WAM Leaders portfolio has delivered gross returns (that's before fees, expenses and taxes) of 15.3% per annum since inception in May 2016, which is superior to the S&P/ASX 200 Accumulation Index average return of 10.2%.
These are the ASX shares that WAM outlined in its most recent monthly update:
Santos Ltd (ASX: STO) and Oil Search Ltd (ASX: OSH)
The fund manager explained that Oil Search is the largest oil and gas exploration and development company incorporated in Papua New Guinea, whilst Santos is a leading supplier of natural gas in Australia.
Both companies benefited in September as oil prices rose to multi-year highs that the market hasn't seen since 2014.
Why? WAM thinks it was simply down to the fact that growth was continuing to grow faster than supply.
Vaccines continue to go into arms around the world in both developed and "emerging" markets. Travel restrictions are easing. These two things combined are helping increase demand for transport-related oil products.
The fund manager noted that it is estimated that in the US, Europe and India, domestic travel has recovered to pre-pandemic levels, while other markets such as the UK and Japan are not far behind.
At around a quarter of global oil consumption, gasoline demand has seen the fastest recovery, while jet fuel demand which makes up around 8% of global oil consumption is still down significantly with air traffic globally down 60% compared to 2019.
There was another element that could be assisting the share prices of these two ASX shares.
WAM pointed out that OPEC+ (the Organisation of the Petroleum Exporting Countries Plus) has left the policy of increasing supply by 400,000 barrels a day in October and November unchanged. That's despite international pressure to return supply more rapidly considering the growth in demand.
The fund manager said that another factor is whether OPEC+ will actually even meet its growth target considering less than half of the growth of production was achieved in August due to disruptions to operations in Angola and Nigeria.
Oil demand continues to grow, the northern hemisphere is heading into winter and there is ongoing 'hesitancy' from OPEC+ members. All of that makes WAM think oil prices will remain elevated for the rest of the 2021 calendar year.
South32 Ltd (ASX: S32)
The other ASX share that WAM referred to was the mining business South32. The fund manager said that South32 continues to be a "significant" contributor to WAM Leaders' outperformance.
South32 makes half of its cash earnings from aluminium and alumina output, where pricing continues to benefit from "rising cost pressures, China's power constraints and supply disruption in both PNG and Indonesia.
The fund manager also noted that the company is benefiting from the metallurgical coal exposure, which makes up around 15% of its earnings. The metallurgical coal market is "tightening" on a strong recovery in global power demand, gas prices and steel production, combined with supply side infrastructure and transport challenges, according to WAM.
Finally, it was pointed out that the price of metallurgical coal is up by 140% in the last six months, and 90% in the last three months.
