Funds with Big Energy Bets
These diversified funds have gone all-in on energy stocks, and that has (mostly) given them a boost in 2021.
A version of this article was published in the October 2021 issue of Morningstar FundInvestor. Download a complimentary copy of FundInvestor by visiting the website.
Energy stocks have been among the market’s best performers in 2021, as the economic recovery spurred a surge in demand from coronavirus pandemic lows. Giants such as Exxon Mobil (XOM) and ConocoPhillips (COP) gained more than 50% for the year to date through Nov. 30, and some energy names gained considerably more. Yet many of these same stocks were among the worst performers in 2020 and for several years before that, illustrating their volatility and short-term unpredictability.
Here are four diversified stock funds with big weightings in energy stocks. Those energy stakes have helped all these funds perform very well this year, but they can be a drag on performance when energy prices fall.
Hotchkis & Wiley Mid-Cap Value (HWMAX)
Lead manager Stan Majcher has a contrarian, deep-value investing philosophy that typically leads him to some of the market’s most out-of-favor areas. In recent years, that has often meant energy stocks, which peaked at around 25% of fund assets in 2018. The fund’s current 20% energy stake is the highest in the mid-cap value Morningstar Category and among the highest of any diversified U.S. mutual fund. Energy holdings such as APA (APA) and Marathon Oil (MRO) have posted big gains in 2021, helping the fund achieve some of the category’s best returns for the year to date through Nov. 30. However, the fund, which has a Morningstar Analyst Rating of Neutral, had some of the worst returns in the category from 2017 through 2019, when value investing was out of favor, and many of its energy holdings contributed to that underperformance.
Invesco Comstock (ACSTX)
This is another deep-value fund, but one that focuses on large-cap companies. The managers seek out stocks that look cheap by various metrics, including price/book and price/sales for cyclical companies, and normalized earnings for growthier names. Over the past few years, this method has favored energy stocks, which stood at 12% of fund assets as of Oct. 31, 2021, about twice the large-value category average. That exposure helped the fund rank in the top 6% of the large-value category for the year to date through Nov. 30, 2021, but it held the fund back from 2018 through 2020 and could do so again.
DFA Emerging Markets Value (DFEVX)
This Neutral-rated fund from quant shop DFA targets stocks in the cheapest third of the MSCI Emerging Markets Index, as measured by price/book ratio. The managers also put more weight in stocks having low price/book ratios, smaller market caps, and higher profitability in an effort to modestly beat the benchmark over the long term. As of Sept. 30, 2021, its 12% energy weighting was more than twice the weighting of the benchmark, part of a general tilt toward cyclical sectors. Indian oil and gas firm Reliance Industries (RLNIY) was the largest holding as of that date, while Brazilian oil giant Petrobras (PBR) and Russian energy giants Lukoil and Gazprom were in the top 20. This tilt has helped the fund rank in the top 12% of its diversified emerging-markets category peers so far in 2021, but as with the above funds, this has followed several years of poor category returns.
Fidelity New Millennium (FMILX)
This is not a deep-value fund like the Hotchkis & Wiley and Invesco funds; rather, veteran manager John Roth takes an eclectic, opportunistic approach, mixing growth stocks with cyclical ones. Lately, that has led him to hold far more energy stocks than the average large-blend fund--11% as of the Oct. 31, 2021, portfolio, including top-10 holdings Exxon Mobil and Hess (HES). Unlike the other funds we just looked at, however, this fund has not had a good year in 2021. Although it managed to beat the large-blend category through the first nine months of the year, and its energy holdings have posted solid gains, the fund’s many financial holdings got hammered over the past month, pulling it down to the category’s bottom quartile for the year to date through Nov. 30. It just goes to show that even a big weighting in a hot sector is no guarantee of short-term success.
David Kathman does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.