Energy, Resource Issues Are Showing Strength
What if they staged a rally and nobody noticed?
That seems to be what’s happening with energy and natural resources mutual funds.
For the first time since 1989, funds in this group have put together two consecutive winning quarters.
And their 3.9% average return during the third quarter of 1992 makes them the No. 2 equity sector for the July-September period, just a point behind utility portfolios.
Yet there’s ample doubt as to whether the current energy-related rally is for real or another flash in the pan. During a time of low inflation and weak economic growth, these commodity-oriented portfolios are having to swim against the tide.
Certainly, investors haven’t been pouring money into natural resources funds lately. Most such portfolios are roughly the size they’ve been for the last year or two.
A lot of people have been disappointed with these investments in the recent past. The 2.9% annual compounded gain for natural resources funds over the last five years pales beside the 7% average return for stock funds in general over that period.
The same pattern of underachievement shows up in the 10-year performance numbers.
But Dick Garvey, president of the Rushmore group of funds in Bethesda, Md., thinks that a recent jump in natural gas share prices could be the start of an important trend.
“Over the last two years, these companies really got hammered,” says Garvey, whose fund family includes the American Gas Index Fund, an unusual portfolio that owns stock in companies that produce, ship and distribute natural gas.
The fund has returned about 9% for the year to date, thanks to a near doubling of gas prices since January.
The clean-burning and abundant fuel makes sense as an environmentally sound alternative to expensive foreign oil, Garvey says. Long-term, he predicts that prices for the commodity will rise as the economy strengthens and more companies convert from oil or coal to natural gas.
In the meantime, investors can look forward to reasonably generous dividends in the gas patch. The Rushmore fund, for instance, yields close to 5%.
But George Roche, manager of the more widely diversified T. Rowe Price New Era Fund, suspects that gas prices might start moving down again, although not to their old lows.
Weather exerts a critical impact on natural gas demand and prices, at least over the short haul, and a warm winter would bode ill for natural resources funds with large holdings in gas stocks, he says.
On the other hand, Roche expects the economy to start growing at a healthier clip once the presidential election uncertainty is over, and this would tend to help oil--the main commodity to which New Era and most other natural resources funds are tied.
Ernst von Metzsch, manager of Vanguard’s specialized energy portfolio, says many oil companies earlier this year drastically curtailed their capital spending programs and reduced payrolls, giving them earnings momentum that should remain favorable even in a flat economy.
As it is, oil stocks are among the market’s leaders, with gains in some cases of up to 25% for the year to date.
At current prices near $22 a barrel, oil is nearly $3 above where it started the year.
And yet, many oil stocks and natural resources funds remain undervalued, says Michael Stolper, publisher of the Mutual Fund Monthly, an investment newsletter based in San Diego.
Stolper recommends a 10% weighting in natural resources funds--specifically the Vanguard portfolio--for growth-oriented investors.
Vanguard Specialized Energy (800-662-7447), T. Rowe Price New Era (800-638-5660) and Rushmore’s American Gas Index Fund (800-343-3355) are three of the six highest-rated natural resources portfolios, according to Morningstar Mutual Funds of Chicago.
The others are: New Alternatives (516-466-0808), PaineWebber Global Energy (800-647-1568) and Putnam Energy Resources (800-225-1581).
The first three funds are sold without a load or commission, while the latter three carry sales charges ranging up to 5.75% in the case of Putnam.
A Tough Stretch
Natural resources funds, which invest mainly in oil companies and other energy stocks, have lagged equity funds in general since the mid-1980s, as indicated by this table showing yearly total returns.
Weak oil prices and modest inflation have dimmed the allure of these investments for most of the past several years. But oil has risen in 1992, propelling energy-oriented funds to their best relative showing since 1989.
Lipper Natural All-Equity Resources Funds Year Funds Average 1985 +17.1% +26.6% 1986 +7.7 +15.9 1987 +4.9 +2.3 1988 +12.1 +13.6 1989 +32.1 +23.8 1990 -7.9 -7.3 1991 +3.7 +30.7 1992* +4.8 -0.5
* Through 3rd Quarter
Source: Lipper Analytical Services
