by Chuck Epstein | January 10, 2011 1:10 pm
In 1960, oil was selling for $2 a barrel and the U.S. produced 70% of its own consumption needs. Then, a little-known organization called the Organization of Petroleum Exporting States, to be known as OPEC, announced that its member nations (Qatar, Indonesia, Libya, the United Arab Emirates, Algeria, Nigeria, Ecuador) would be meeting collectively to determine oil prices. At the time, people didn’t suspect that this new group would be the single largest factor influencing the world’s economy over the next half-century.
Today, almost 70% of U.S. oil comes from other nations and while no one knows for sure, some experts contend that world oil production is expected to peak around 2010. After that, growing demand, especially from developing nations, will exceed the shrinking supply.
In the fourth quarter of last year, energy funds have been sizzling, returning 22.8% and outdoing the S&P 500 by 7%. The Energy Information Agency now says developed countries will increase oil consumption as their economies pick up in 2011. Oil traded at about $70 to $90 a barrel in 2010, but one analyst, Phil Weiss of Argus Research, said he expects oil to trade on average for about $84 a barrel, with a range of $50 to $110 a barrel over the year.
With this as a backdrop, here are five oil funds which may provide opportunities in this essential commodity sector this year.
Icon Energy (MUTF:ICENX[1])
Assets under management: $620 million
Expense ratio: 1.24%
Top holdings: Chevron (NYSE:CVX[2]), Exxon Mobil (NYSE:XOM[3]), Halliburton (NYSE: HAL[4]), Schlumberger (NYSE:SLB[5]), Conoco (NYSE:CON[6])
Icon is a specialized, smaller fund which is more nimble than others in the sector. During the periods when it performed well, it was diversified into the best stock picks[7] in industrial materials and business services to complement its core energy position. It showed good active management by being long and short other sectors in the energy category, as well as in its investment style categories which have changed over the years. Manager Derek Rollingson has headed the fund since its inception in 1997. Rollingson, a former research analyst, shows his talents in his portfolio capitalization weighting; he is willing to hold over-benchmark weights in small- and medium-cap stocks where opportunities may arise faster than in the giant and large cap stocks that often include the over-researched integrated oil names.
Fidelity Select Energy (MUTF:FSENX[8])
Assets under management: $2.37 billion
Expense ratio: 0.90%
Top holdings: Chevron, Exxon Mobil, Occidental (NYSE:OCY[9]), Schlumberger, Transocean (NYSE:RIG[10])
This fund has suffered an erratic performance and over the past decade — its best showing was in the 10-year period when it ranked in the top 39% of its peers; its worst rank was 73% in the three-year period. Part of that performance problem may be due to the fund’s large size and its large weight (over 50%) in large-cap value energy stocks. As the names of its top holdings attest, it’s hard to produce alpha in this heavily-covered sector.
Rydex Energy (MUTF:RYEIX[11])
Assets under management: $89 million
Expense ratio: 1.38%
Top holdings: Chevron, ExxonMobil, Occidental, Schlumberger, Conoco
This fund ranks in the middle of the entire energy fund category, so it may serve as more of an example of how concentrating on such huge energy names makes it difficult to deliver alpha (risk-adjusted performance). Its average rankings come from exposure to the largest names in the energy category, often in the large-cap blend sector. About three-fourths of the funds are in energy and consumable fuels and one-fourth is in energy equipment. Large growth and value account for 50% of the portfolio, but it also has about 33% of the portfolio in non-U.S. stocks. Its rankings over the one-, three, five- and 10-year periods range from 42% to 55%. Possible drags on the fund can come from its exposure to equipment which can remain static when exploration or production demand stagnates.
Guinness Atkinson Global Energy (MUTF:GAGEX[12])
Assets under management: $142 million
Expense ratio: 1.18%
Top holdings: BP (NYSE:BP[13]), Chesapeake Holdings (NYSE:CHK[14]), Suncor Energy (NYSE:SU[15]), Newfield Exploration (NYSE:NFX[16]), Canadian Natural Resources (NYSE:CNQ[17])
This is a newer value-oriented fund managed by Will Riley. It’s also a good example of a fund which came out of the starting blocks strong and has more recently faded. Its category rankings over the first three and five years of existence were a very impressive 7% and 8%, respectively, but in the last year, the fund fell into the 63rd-percentile ranking. One reason for the past outperformance has been due to its stock selection (about half international), multi-market cap exposure, and large-cap value style holdings. Yet it is a focused fund and holds over 99% of its holdings in the energy stocks, including natural gas. Its holdings are very different from other funds profiled here which gives it a whole different strategy. During the fourth quarter 2010, the fund bought shares in integrated oil companies Hess (NYSE:HES[18]) and Valero Energy (NYSE:VLO[19]) that were undervalued and selling for a price-earnings ratio of 10.5 times next year’s earnings compared with a multiple of 13.5 for the overall market, Riley says.
ProFunds UltraSector Oil & Gas Investor (MUTF:ENPIX[20])
Assets under management: $48 million
Expense ratio: 1.69%
Top holdings: Chevron, Exxon Mobile, Occidental, Schlumberger, Conoco, Apache (NYSE:APA[21])
This is a leveraged fund which seeks to deliver150% of gains in the Dow Jones U.S. Oil & Gas Index. As a fossil fuel index, it covers the gamut, and includes oil drilling equipment and services, coal, oil companies, pipelines, liquid, solid or gaseous fossil fuel producers and service companies. Since leverage works both ways, it has had some rough spots over the last decade as some sectors have sputtered, while other gained. This may account for fund’s low rankings from Lipper in almost all categories, including performance, expense and capital preservation. It has underperformed its peer group in the three-, five- and 10-year time frames, but its more recent one-year performance was positive and it pushed into the top 13% of similar funds. Still, it carries a slightly negative alpha (-0.83) which could change quickly in a leveraged fund.
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