Funds Place Bets on BP

Investors have been divided over  BP's (BP) prospects after the April 20 Deepwater Horizon accident in the Gulf of Mexico. Has the disaster put the company's future in jeopardy, or has market overreaction created a unique opportunity to buy the oil giant at a discount?

At the Morningstar Conference last month, the general tone tilted toward caution, and several managers noted that they could not satisfactorily determine the extent to which BP's stock slide was justified. Daniel O'Keefe of  Artisan International Value Investor  (ARTKX), for instance, said he looked at BP because of the dramatic value destruction but hadn't purchased it because he could not evaluate the extent of the losses from the spill. Another value-minded manager, Philippe Brugere-Trelat of  Mutual Global Discovery  (TEDIX), said he dipped a toe into BP because the stock fell so substantially but that he has kept it to a very small position because he remains concerned about future fines, penalties, and unknowns.

Estimating costs requires making assumptions about several factors, including not only direct cleanup costs, but also civil penalties that will be determined through the court system during the next several years. Morningstar analyst Catharina Milostan predicts civil penalties could range broadly, from $4 billion to $46 billion. The extent to which BP will be able to contain the oil also remains unclear--a full solution is not expected until relief wells are completed in mid-August.

However, a look at our Shareholders data shows some mutual funds are sticking their necks out and loading up on BP shares. Meanwhile, other funds are cutting their losses and selling. The bets come amid continued uncertainty regarding the extent of BP's liabilities.

Funds Buying BP Most Aggressively
Including funds with portfolio data from April 30 or later:

BP was a new holding for three of the top five biggest recent BP purchasers, while the other two increased their holdings substantially, by approximately 60% and 80%.

Fidelity stands out as a firm betting in favor of BP, having purchased 5,679,400 shares between  Fidelity Diversified International (FDIVX),  Fidelity Europe (FIEUX), Fidelity Series Large Cap Value , and  Fidelity Dividend Growth (FDGFX). It's interesting that Fidelity Dividend Growth got in on the action, adding BP as a new position despite the fact that BP has suspended its dividend for the rest of the year at a minimum. Five other Fidelity funds also purchased significant amounts of BP: Fidelity VIP Contrafund ,  Fidelity Balanced  (FBALX),  Fidelity Equity-Income  (FEQIX),  Fidelity Value  (FDVLX), and Fidelity Series International Value (FINVX) added between 257,600 and 389,800 shares each. BP was a new holding for Fidelity Equity-Income and Fidelity Value.

It's worth noting that a handful of Vanguard funds, including  Vanguard Wellesley Income  (VWINX) and  Vanguard Wellington  (VWELX), had loaded up on BP shares as of their March 31 portfolios (the most recent available data), increasing their shares by 30% and almost 10% from their prior portfolios, respectively.

Morningstar has not received updated portfolio information from Vanguard since 3/31. Funds are only required to report holdings quarterly, and Morningstar has not yet received 6/30 portfolio information from Vanguard. Vanguard's website offers a little more information, as it lists funds' top ten holdings as of 6/30 (but full holdings beyond the top ten are still listed as of 3/31).

BP was Vanguard Wellesley's fourth-largest holding as of the 3/31 portfolio, but is no longer in the fund's top 10 holdings as of 6/30. We can't tell the degree to which the change is the result of selling or BP's reduced value.

There is no information yet for whether Vanguard Wellington's BP position is now reduced, because BP was not in the top 10 holdings as of the 3/31 portfolio.

We'll investigate further once we receive complete portfolio data from Vanguard.

Funds Dumping BP in the Largest Quantities

 BlackRock Global Allocation (MDLOX) wasted no time limiting its BP exposure--it sold more than 1 million shares and eliminated 86% of its BP holdings by the end of April. Hartford, meanwhile, sold 631,600 shares across two portfolios--not surprising given that  Hartford Dividend & Growth  (IHGIX) and Hartford Equity Income (HQIAX) are dividend-focused.

Are you thinking about investing in BP yourself? Read Morningstar director of personal finance Christine Benz's recent article about important considerations before jumping into BP or other mega-cap names after big share-price drops.

This article has been corrected since its original publication. Click here for details.