Energy Brightens These Well-Run Funds
Oil prices have been a boon, but these funds have proved their mettle over time.
Anyone who has been to the gas pump recently knows that energy prices have been on the rise, and so have energy companies' profits and stock prices. Over the past five years, natural resources funds have consistently pounded the 17 other Morningstar domestic-stock categories. And for the year to date ended May 16, 2008, this category has soared 13% while most other categories are in the red.
Given this sector's recent success, it may be tempting to pile into an energy-focused fund, but we think a more measured approach is best. We looked for funds whose managers have stashed a meaningful fraction of the portfolio in energy but, overall, run successful well-diversified portfolios. To find "high-energy" funds that have been long-term winners, we cast the net wide by including all funds covered by Morningstar analysts that fall under the balanced, domestic-stock, and international-stock categories. We also excluded specialty-stock categories, because we did not want any natural resources sector funds to pop up in our results. In addition, we added the criterion "Distinct Portfolios Only," so the screen would return one share class of each qualifying fund. Some other basics for our search: The funds must have a below-average expense ratio, must be open to new investment, and must have initial investment minimums of $10,000 or less.
Next, we looked for funds with at least 15% of their assets in energy stocks. We wanted to find funds that have performed well lately--no doubt in part due to their energy holdings--but also over the long term. So, we required that the funds have a top-third finish relative to peers over the past year as well as the past decade. The last criterion is management teams with 10-year records, so we can be sure that the managers who generated that peer-beating return are still at the helm.
The Premium Fund Screener returned the following results:
American Century Equity Income (TWEIX)
American Funds Fundamental Investors (ANCFX)
FPA Crescent (FPACX)
GAMCO Westwood Balanced AAA (WEBAX)
Keeley Small Cap Value (KSCVX)
Legg Mason Partners Appreciation (SHAPX)
Selected American Shares (SLASX)
Sentinel Common Stock (SENCX)
State Farm Growth (STFGX)
Vanguard Emerging Markets Stock Index (VEIEX)
This screen returned an interesting mix of categories: diversified emerging markets, large blend, large value, moderate allocation, and small blend. In each case, the fund's manager or managers have dedicated more assets to energy than their typical category peer, but the managers' energy bets and their outlooks on the sector vary. Some of the managers plan to stick with their energy holdings for the long term, while some have built sizeable energy stakes more recently. Others have enjoyed the rally and are now taking some profits off the table.
Steve Romick, longtime manager of FPA Crescent (FPACX), goes anywhere that will provide market-beating returns without a lot of risk. Due to stock market volatility in the past year, he simply hasn't found the cheap, small-cap stocks that he typically likes. This has led him to hold upwards of 30% of assets in cash, in addition to letting some longer-term energy holdings grow. Oil and gas companies ConocoPhillips (COP) and ENSCO International (ESV) are two of his favorites--these stocks represent about 10% of assets (and roughly half the fund's total energy stake). These picks have helped the fund to an impressive 5% return for the year to date ended May 16, 2008, while the typical peer is in the red. True, Romick's approach makes for a quirky moderate-allocation fund, but long-term returns show that he has a knack for asset-allocation moves.
Keeley Small Cap Value (KSCVX) is a small-blend offering run by John Keeley Jr., the firm's founder. He looks for small companies going through corporate restructuring, with the aim of taking advantage of efficient spin-offs, IPOs, or stock prices below book value. Healthy cash flows also are a must, and Keeley has favored cyclical energy and industrial stocks for some time based on his belief that demand for infrastructure and energy-related exploration will remain strong. Keeley is pretty patient with his picks (the fund has low turnover), and longer-term holdings like coal company Alpha Natural Resources (ANR) and oil and gas services firm McDermott International (MDR) have helped the fund clobber most peers over the past four and a half years.
Many developing countries are rich with natural resources, so they have certainly benefited from the commodity boom in recent years. Vanguard Emerging Markets Stock Index (VEIEX), run by Duane F. Kelly, tracks the MSCI Emerging Markets Index. This index, and therefore the fund, holds roughly 16% of assets in energy-related names. In fact, Russian and Brazilian energy giants Gazprom and Petroleo Brasilerio (Petrobras) represent about 5% of assets, which is considerable given there are hundreds of stocks in the portfolio and the index. Keep in mind that when commodities-related names start to cool off, that will put the brakes on the fund's energy-related names as well as its high-flying returns of recent years. That said, this fund has been a decent choice for emerging-markets (and energy) exposure over the long haul because its low expense ratio gives it a real advantage in tracking its bogy.
Morningstar.com Premium Members can run this screen themselves by clicking here. Not a Premium Member? You can still run this screen by taking a free, 14-day Premium Membership trial. (Note that the results may change as funds come in or drop out of the screen over time.)
Karin Anderson does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.