What Top Fund Managers Are Saying About Energy
Many of our favorite value-leaning funds have been investing in the sector for a long while.
Did the oil-price collapse in late 2014 create opportunities for bargain-hunting investors, or is rushing into energy stocks a sucker's bet?
With truly cheap stocks few and far between, it's a key question for value-oriented investors today. Morningstar's equity analysts decreased their price target for oil in the first quarter but believe that selective investors can identify attractive opportunities here and there. As of mid-April, eight energy stocks in Morningstar's coverage universe rated 4 stars or better and earned a wide moat assessment; only Spectra Energy (SE) garnered 5 stars and a wide moat rating.
Meanwhile, a peek into the portfolios of large-cap U.S. equity Morningstar Medalist funds reveals a strong divergence of opinion on the question of whether the oil patch presents an opportunity right now. Some notable value funds-- Fairholme (FAIRX), for example--had literally nothing staked in the sector as of their most recently available portfolios. Others, meanwhile, have taken much more sizable positions than both their category peers and indexes; but those positions aren't necessary new--they've been investing in the energy sector for a while. Not surprisingly, value medalists, on average, have much more staked in the energy sector than funds on the growth side of the Morningstar Style Box. But an emphasis on energy doesn't appear to be the exclusive domain of bargain-hunters.
Here's a rundown of the medalists with the highest and lowest energy weightings as of their most recently available portfolios.
Medalist Average: 10.09% | Category Average (All Funds): 9.83%
High Weighting/%: Artisan Value/18.44% | Low Weighting/%: Fairholme/0%
Our favorite funds in the large-value category, on average, have energy weightings that are right in line with the large-value category norm. But that average conceals a broad gradation of stances.
The Bronze-rated Artisan Value (ARTLX) had the highest energy weighting of any medalist fund as of its most recently available portfolio--more than 18% of equity assets. Though, energy stocks are not a new emphasis for the fund and, therefore, are not necessarily an outgrowth of falling prices in the sector. While the portfolio currently holds more than 18% in the sector, the weighting has been as high as 23% of assets within the past three years. Senior analyst Greg Carlson reports that weak picks in the energy patch dragged down results in years past, but all of its top-weighted energy picks are in the black thus far in 2015, contributing to its top-flight relative returns for the year to date.
The Silver-rated American Century Equity Income (TWEIX) also had 18% of its most recently available full portfolios in the energy sector. But in contrast with the Artisan fund, which has often focused on mid-caps and smaller large caps, it was emphasizing blue-chip energy majors such as ExxonMobil (XOM) and Total (TOT). (It had scaled back its energy weighting somewhat in the first few months of the year, according to information on its firm's website.)
The Silver-rated Fairholme was the sole large-value medalist to exclude the energy sector altogether, as of its most recently available portfolio. Such idiosyncratic positioning is nothing new for this fund, however. Senior analyst Kevin McDevitt notes that lead manager Bruce Berkowitz sticks with his circle of competence, as evidenced by the fact that he holds the lion's share of assets in the financial sector and literally nothing in seven other sectors, including energy. Interestingly, GoodHaven (GOODX), steered by two former members of Fairholme's investment team, has found more to like in the energy sector; at 13% of assets, its weighting is higher than its peers' and focuses on lesser-known names such as WPX Energy (WPX) and Birchcliff Energy (BIREF).
Medalist Average: 7.42% | Category Average (All Funds): 7.87%
High Weighting/%: Longleaf Partners/17.20% | Low Weighting/%: Primecap Odyssey Stock/2.33%
Longleaf Partners (LLPFX) has never shied away from controversial names in controversial pockets of the market, so it's probably not surprising that its energy position at year-end was the highest of any medalist fund and more than double that of its typical peer. Yet, its energy position is nothing new and is an outgrowth of bets on individual companies rather than on the sector at large. Interestingly, the fund's longtime top energy position, Chesapeake Energy (CHK) dropped out of the fund's top 10 holdings in the year's first quarter, and its total energy stake declined to 13% of assets, according to information on Longleaf's site.
With 15% in the energy sector, Vanguard Capital Value (VCVLX) has the next-highest weighting of the large-blend medalists. Its managers have tended to favor exploration and production companies, which have fallen hard during the recent tumble in oil prices.
Primecap Odyssey Stock (POSKX) had the lightest weighting in the energy sector of any large-blend fund--just over 2% as of its most recently available portfolio. Indeed, several Primecap-managed funds appear on our lists of large-cap medalists, and none has an energy weighting greater than 3% of equity assets. That shouldn't come as a surprise to investors familiar with the Primecap house style of buying strong growers when they're in a trough; energy firms, with their cyclicality and capital-intensive natures, rarely fit the bill.
Medalist Average: 4.48% | Category Average (All Funds): 4.46%
Highest/%: RiverPark/Wedgewood/13.56% | Lowest (tie)/%: Amana Growth, Morgan Stanley Instl Growth/0%
Not surprisingly, large-growth funds tend to stake much less in the energy sector than do large-blend and value offerings. That said, a handful of large-growth medalists were sticking their necks out for the energy sector as of their most recently available portfolios. Leading the way was the little-known (but Silver-rated) RiverPark/Wedgewood (RWGIX). As with several of the aforementioned funds currently overweighting the energy sector, its energy position isn't a new thing: Top energy picks Schlumberger (SLB) and National Oilwell Varco (NOV) have been in the portfolio for more than three years. Senior analyst Dan Culloton says big sector overweights and underweights are not uncommon here, as the fund maintains a benchmark-agnostic strategy.
Clearbridge Aggressive Growth (SHRAX) is another large-growth fund that pays little to no heed to market benchmarks or to its peers; instead, managers Richie Freeman and Evan Bauman put the portfolio together one stock at a time and let the chips fall where they may. As with RiverPark/Wedgewood, this fund's energy holdings are not new here: Top two picks Anadarko Petroleum (APC) and Weatherford International (WFT) have been in the portfolio for more than a decade.
Not surprisingly, many of the large-growth medalist funds were very light on energy stocks, and two funds, Amana Growth (AMAGX) and Morgan Stanley Institutional Growth (MSEQX), held none at all. Amana Growth, which operates in accordance with Muslim principles, eschews energy stocks as a matter of course because such companies typically carry high debt loads. Morgan Stanley Institutional Growth, meanwhile, generally avoids the energy sector because few companies there fit management's emphasis on companies with strong cash flows and high returns on invested capital.
Christine Benz does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.