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Funds Hurt by the Plunge in Oil Prices

There have been some startling reversals among energy-heavy funds.

David Kathman, 10/28/2008

One economic story that has sometimes been overlooked amid all the other financial turmoil of recent months is the dramatic plunge in oil prices. In early July, oil was hitting all-time highs of nearly $150 a barrel, having more than doubled over the previous year on the back of a weak dollar and strong demand from emerging markets. Since then, oil prices have fallen off a cliff, as the financial crisis has worsened and spread around the world, dampening demand and also strengthening the dollar as a (relatively) safe haven. Oil prices have fallen more than 50% from their highs of just three months ago, recently falling below $70. Natural gas prices have followed a similar but less dramatic trajectory over the same period.

This roller-coaster ride has had a major effect on energy stocks, both those that rely directly on oil and gas prices, such as drillers, and those where the dependence is less direct, such as oil-services companies. To give one especially dramatic example, oil-services firm National Oilwell Varco NOV gained 52% between March 31 and June 30, but it has lost 65% since then. Anadarko Petroleum APC has lost more than half of its value since its June 18 peak, after gaining 32% in the previous four months.

Mutual funds that own these stocks have naturally been affected, sometimes in dramatic fashion. Natural-resources funds, which tend to be very heavy in energy and other commodity stocks, have been particularly hard-hit. The average fund in that category is down more than 40% over the past three months, and some funds, such as BlackRock Global Resources SSGRX, are down more than 50%. Some diversified mutual funds also have big energy bets, and they're up against a much wider variety of competitors, including some with little or no energy exposure.

We thought it would be interesting to see which diversified stock funds (i.e. those in the nine Morningstar Style Box categories) have the largest energy stakes, and how they've fared lately. The following table lists the top 10 such funds, including each fund's category, the size of its asset base, the percentage of its portfolio, its percentile rank in its category over the past three months (as of October 23), and its percentile rank in its category for the first six months of this year, from January 1 through June 30.

 Diversified Funds with Big Energy Stakes


Energy % % Rank
% Rank
Large Blend
7,342.5 57.68 99 1
Monteagle Value MVRGX
Large Blend
16.7 45.76 98 1
Auer Growth AUERX
Small Growth
123.7 45.23 100 3
Large Growth
593.6 44.76 50 1
Mid-Cap Value
1,352.1 43.99 28 1
Burnham BURHX
Large Blend
76.9 40.86 16 14
Van Kampen Exchange ACEHX
Large Blend
66.7 40.23 82 1
Bryce Capital Value BCFVX
Mid-Cap Growth
9.5 40.13 27 1
Fidelity Leveraged Company Stock FLVCX
Mid-Cap Blend
5,822.8 38.45 98 1
Transamerica Small/Mid Value IIVAX
Small Blend
794.1 37.67 90 2
* As of 10-23-2008.

One thing that immediately stands out here is how well these funds did in the first half of the year. All of them blew away their categories with double-digit gains during that six-month period, with seven of the 10 ranking in their category's top 1%--all the more impressive because there are seven different categories here. In sharp contrast, each of these funds has lost at least 25% over the past three months; only three have significantly beaten their category during that time, and half rank in the bottom decile. All five of these bottom-decile funds--CGM Focus CGMFX, Monteagle Value MVRGX, Auer Growth AUERX, Fidelity Leveraged Company Stock FLVCX, and Transamerica Small/Mid Value IIVAX--were among their categories' best performers in the first half.

It's hard to avoid the conclusion that these funds' big energy stakes are a major factor behind this whiplash-inducing reversal in performance. The funds with the biggest swings also tend to have a lot of holdings in other commodities, which have been going through the same boom-and-bust behavior in recent months. For example, Monteagle Value's top four holdings are all energy stocks, but the rest of its top 10 prominently features commodity plays such as Barrick Gold ABX, Alcoa AA, and Newmont Mining NEM. The portfolio of CGM Focus, managed by Ken Heebner, consists almost entirely of energy, industrials (mostly basic materials), and some short positions on financial stocks. At least that was the case as of June 30, the date of the most recent portfolio released by the fund; more recently, Heebner has said that he has since sold most of the fund's energy and materials stocks, though obviously not before a lot of damage was done.

Of course, neither of these periods (of soaring oil prices in the first half of 2008, and of plunging prices since then) is typical of what investors should expect in the long term. Presumably all this--oil prices, energy stocks, and the funds that hold them--will settle down eventually. But the wild swings of the past year provide a vivid illustration of the short-term risks of holding any fund that's highly concentrated in one sector, especially a sector as volatile as energy. Some of these funds, notably Heebner's CGM Focus and Bob Rodriguez's FPA Capital FPPTX, have excellent long-term records, but their tendency to make big sector bets make them appropriate only for investors who can handle some major ups and downs in the short term.

David Kathman is a fund analyst with Morningstar.



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