Rising petrol prices used to boost energy shares. So why are fund values going down?
By Kerry Hannon
August 2002
It used to be so easy. For the most part, energy fund values rose and fell with oil prices. So far this year, however, this relationship has come unglued. The commodity’s price has risen 50 percent, to $27 per barrel, but energy funds are down 10 percent through late July. Of course, that’s far better than the Standard & Poor’s 500 index, which was off nearly 27 percent during the same period, but not exactly what you’d expect.
“Nothing is trading on fundamentals,” says John Segner, portfolio manager of $347 million Invesco Energy Fund, down 14.34 percent through mid-July. “Nothing is immune from the pressure to sell.”
Some of the slide comes from definitional problems. Enron Corp.'s bankruptcy, not to mention the travails of energy traders like Dynegy and Williams Cos., have made investors wary of the sector. In fact, most of these companies are more the province of utility funds. Many energy funds don’t hold these stocks at all, and those that do tend to have exposure of less than 5 percent.
Even so, energy fund returns have lurched quite a bit. For the first quarter the group was up 12 percent; between May 1 and late July the group’s returns fell about 20 percent on average, according to Morningstar.
In addition to the general pressure of the bear market, investors were earlier in the year overly optimistic that a nascent economic recovery would spark a significant increase in the demand for energy. Instead, notes John Porter, manager of $219 million-in-assets Fidelity Select Energy Fund, “an increasingly weakening economy means weaker demand for energy.”
Porter notes that even natural-gas prices, which affect a sizable portion of an energy portfolio, have retreated from $4 per 1,000 cubic feet in April to a recent $2.93.
Despite the recent declines in energy shares, big oil companies’ equity valuations are still on the high side. With multiples of 14 to 16 times estimated earnings for 2002 and 2003, their share prices “are not exorbitant, but they’re not cheap either,” Porter says. Like most fund managers, he keeps a hefty portion of his assets -- between 50 and 55 percent -- in large integrated oil stocks like ChevronTexaco Corp. and Exxon Mobil Corp.
Portfolio manager Ernst von Metzsch, who runs the $1.3 billion Vanguard Energy Fund, agrees that big oil stocks are not cheap. Still, he expects the stocks to outperform. “These are financially sound companies with conservative accounting and dividend yields of 3 percent or 4 percent,” von Metzsch says. “There’s an appetite in this market for conservative, well-run companies.”
The numbers tend to support von Metzsch’s view. Energy funds have been attracting strong cash flows. For the first half of the year, the funds pulled in $150 million in net new cash despite June outflows of $110 million, according to Lipper.
Assets aren’t all going into Big Oil stocks. The $193 million State Street Research Global Resources Fund, down 12.98 percent this year through late July, bets on small-cap exploration and production firms. Says the fund’s Daniel Rice, “We give up the liquidity because we think these companies can grow two to three times faster” than their large-cap counterparts.
Right now, however, both big- and small-cap fund managers just wish fund prices will again head in the same direction as oil prices.
Institutional funds scoreboard
Morningstar has ranked the following as last year’s top ten energy stock funds.
Fund name Total return calendar year 2001 Total return year-to-date 7/25/02 Assets 6/30/02 ($ millions)
Ivy Global Natural Resources Fund (A) 15.39% 5.34% $39.8*
RS Global Natural Resources Fund 0.61 3.63 33.7
Vanguard Energy Fund 2.55 10.60 1,593.2
State Street Research Global Resources Fund (A) 2.81 12.98 193.5
Icon Energy Fund 3.31 18.12 91.0
T. Rowe Price New Era Fund 4.35 12.59 1,179.9
UMB Scout Energy Fund 4.63 15.88 1.5*
American Century Global Natural Resources Fund (Inv) 5.20 9.68 35.0
Van Eck Global Hard Assets Fund (A) 8.56 1.84 48.7
Merrill Lynch Natural Resources Trust (B) 9.10 12.16 128.5**
* Assets as of 5/31/02.
** Assets as of 4/30/02.
Source: Morningstar.
