Betting on a Rebound in Resource Stocks

This article was published in the July 2014 issue of Morningstar FundInvestor. Download a complimentary copy of FundInvestor here.

Want to find some funds due for a rebound? Look for sectors that have been crushed. The markets tend to rotate through sectors. Fund managers often have a bias or their strategies have a bias toward certain sectors so that they, too, go in and out of favor.

The past five years have been a time when stocks have rebounded but commodity prices have not. That's partly because of the great recession and partly because of signs that China is slowing down. But these things go through cycles. Those sectors merely need to be closer to marketlike performance for good funds to produce improved performance.

I looked for medalist funds that had sizable weightings in energy and materials. Of course, low expense ratios increase a fund's chances for success, so I'll take them in order of costs.

 DFA Emerging Markets Value (DFEVX) is a passively managed fund that charges just 0.57%. It has 14% in energy and 14% in materials because emerging markets are natural-resource-heavy. The fund's trailing three- and five-year returns are subpar in part because of those weightings, but its 10- and 15-year figures are strong, and I don't see why it can't return to form. It has become easier for investors to gain access to DFA, but it still isn't available on every platform.

 FPA Capital is a closed mid-value fund run with tremendous levels of caution. I'd be inclined to hold on if I owned it, and it's also worth keeping in mind should it reopen. Bob Rodriguez handed the reins to Dennis Bryan, and, along with later addition Arik Ahitov, he's done a fine job of finding good companies trading at big discounts to their values. That's led the fund to some oil drillers, among other things. It has 26% in energy and 1% in materials.

 Dreyfus Appreciation (DGAGX) is quite a different animal. Subadvised by the venerable Fayez Sarofim & Co. of Houston, the fund loves blue chips in both consumer and energy areas. They are patient investors and patient employees, as there's little turnover in the manager suite as well. The fund's emphasis on quality gives it exposure to another lagging factor. All told, it has 18% in energy and 3% in materials, making it an excellent core holding.

 Delafield invests in a different part of the market. The fund looks for deep-value names in the small- and mid-cap realm. Naturally, a beaten-down sector like materials is appealing. The fund has 27% there and 6% in energy. Three- and five-year numbers are unimpressive, but we see plenty of reason to keep the faith with managers Dennis Delafield and Vince Sellecchia. They've built a strong long-term record by looking for good restructuring bets in companies suffering from failed strategies or mergers. You can get companies on the cheap that way, though you have to avoid value traps, and they've done a fine job.

The closed  Artisan Small Cap Value is in a dreadful slump because of its sector biases and some poor stock selection. (The fund has 19% in energy and 7% in materials.) That's disappointing, but the long-term record tells a different story that gives us hope this slump isn't permanent.

 TCW International Small Cap manager Rohit Sah loves emerging markets, energy, and materials, and the fund has suffered for it. It has 9% in energy, 23% in materials, and an astounding 39% in India. In short, this fund is higher-risk than most emerging-markets funds. Sah had a good record at Oppenheimer, but this is a fund that should only be held as a small position.

For a list of the open-end funds we cover, click here.
For a list of the closed-end funds we cover, click here.
For a list of the exchange-traded funds we cover, click here.
For information on the Morningstar Analyst Ratings, click here.