In a recent episode of “Behind the Ticker,” David Allen, CFA and founder of Octane Investments, discussed his background in finance and the firm’s strategy for its recently launched All-Cap Value Energy ETF (ticker: OCTA). Allen, who began his career in 1992 as a trader at Merrill Lynch and witnessed significant market events like the breaking of the Bank of England, developed a keen interest in geopolitics and energy markets early on. His experience spans institutional sales and trading, which later inspired him to start Octane Investments to capitalize on what he identified as a market gap created by divestment from traditional energy sectors.
About David Allen and Octane Investments
Allen explains that Octane Investments was founded to take advantage of the “carbon risk premium” and other risk premiums inherent in the energy market, such as the equity risk premium, the small cap premium, and the value premium. The firm focuses on identifying undervalued companies in the energy sector, particularly those that are being overlooked or divested due to environmental concerns. OCTA, Octane’s All-Cap Value Energy ETF, is structured around an all-cap value strategy, investing in energy companies with stable earnings, strong balance sheets, and a commitment to returning capital to shareholders.
Investment Strategy and Approach
Throughout the conversation, Allen emphasized the significant opportunity in traditional energy sectors, despite the increasing focus on sustainability and renewable energy. He highlighted that many investors are avoiding energy stocks, leading to a scarcity of capital and undervalued opportunities in the market. OCTA seeks to capture this value by focusing on companies that are profitable, financially stable, and returning capital to shareholders, such as through buybacks and debt elimination. Allen explained that the fund’s holdings are curated based on a decision tree that screens for price-to-earnings ratios, balance sheet strength, and capital return strategies.
Allen also touched on how OCTA offers exposure to a range of energy subsectors, including refiners and tankers, and discussed how the fund’s structure mitigates risks by limiting exposure to any single company. The ETF is rebalanced weekly, and the portfolio includes companies from developed markets, avoiding exposure to non-OECD markets where political risks are higher. Allen sees OCTA as a strong complementary allocation for investors who are underweight in energy and stressed that, with energy representing less than 4% of the S&P 500, there is a structural underweight in the sector that his ETF addresses.
Deeper Dive: Insights from the Full Conversation
Beyond the headline strategy, the full conversation between Brad and David Allen covered several additional themes worth highlighting for advisors and investors.
On Process and Philosophy
We want relatively stable E and a cheap P. So, that's the first basket. We got a data feed from empirical research partners. It's curated data feed on about 170 names that trade in the US. We buy AVRs, but only of developed world companies. So, however much I'd love to be in Petroprough or their gorgeous field. I don't want to lose 500 basis points overnight. If the people in Brazil change their minds about Petroprough. So, with that all-camp value approach, the first decision tree node is price earnings.
And in somewhere under the radar, I talk about a widget conglomerate. It's trading at a $100 million market cap. It's in every big index. When the German pension fund buys a global equity beta through MSCI world, they're putting, you know, 80 cents into this widget conglomerate. But the widget conglomerate, you can replicate their business by taking pieces of that and putting them together. So what I've manufactured in this 30 stock portfolio in octa and it is probably more volatile than you're integrated company.
Market Context and Positioning
I think Jamie Diamond himself told Congress that it would be a hell of scale. If we lived in a world without the ability to burn hydrocarbons. And so I launched the firm to, as a pure reaction, a market reaction to this birth of capital that's going to these publicly traded companies. So before we get to into the weeds on the energy sector and the ETF, what do you like to do when you're not working and when you're not behind the desk?
For a couple of reasons, first of all, to sign a black rock and invent something much better overnight. And updated a lot better. In more importantly, I can't sell a black box if I didn't design it. So, I went back to the very basics. And I built a very simple decision tree. And the decision tree may be something like what you'd build. If you had a greenfield's approach to investing in the energy sector. The first node is PE.
And so let's say we start with about 150 names. We try to take the top roughly one-third of those names from a forward PE ratio and from an introsectoral valuation. And so let's say we come up with call in 50 or 60 names. And then we do the debt to equity test. Now this is where a little bit of art comes into the science. Because if we're looking at six or seven sub-sectors, if you have let's say a scale refiner, a household name refiner that ends up in, for example, cows and other successful ETFs, you create cash flow, great buybacks.
Notable Insights
"Because it seems like it's the biggest hobby in this business for some reason."
"But some of the biggest clients that I had mainly East Coast public funds were going whole sale out of traditional energy companies."
Key Takeaways
- The firm focuses on identifying undervalued companies in the energy sector, particularly those that are being overlooked or divested due to environmental concerns.
- OCTA seeks to capture this value by focusing on companies that are profitable, financially stable, and returning capital to shareholders, such as through buybacks and debt elimination.
- Allen also touched on how OCTA offers exposure to a range of energy subsectors, including refiners and tankers, and discussed how the fund’s structure mitigates risks by limiting exposure to any single company.
What This Means for Advisors
For financial advisors evaluating options for client portfolios, this conversation with David Allen highlights important considerations around risk management. Understanding the strategy behind each fund—not just the ticker—helps advisors make more informed allocation decisions and better communicate the rationale to clients.
The themes of risk management and quantitative investing discussed in this episode are particularly relevant in the current market environment, where advisors are increasingly looking for differentiated solutions that go beyond traditional benchmarks.
Listen to the Full Episode
This article is based on an episode of Behind the Ticker, hosted by Brad Roth, Founder and CIO of THOR Financial Technologies. For the full conversation with David Allen, including additional nuances and details, listen on Spotify, Apple Podcasts, or watch on YouTube.