Energy revs up your funds
The economic turnaround is raising energy prices and helping fuel natural-resources funds.
March 4, 2002: 6:53 p.m. ET
By Staff Writer Martine Costello
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NEW YORK (CNN/Money) - Up until recently, the U.S. economy has been like an old car that needs a jump-start just to make it out of the driveway.
But the economic rebound is fueling strong performance in the energy sector -- and that could rev things up in your portfolio.
Boring natural-resources funds, which invest a hefty portion of their assets in energy, are the best-performing category this year, up an average of nearly 4 percent as of March 1, according to Morningstar.
Four percent might sound puny, but compare that with communications funds, which are down 17 percent this year, or mid-cap growth funds, off 6 percent. Virtually every domestic fund category is in serious pain.
And with the economy in the early stages of a recovery, that could be just the beginning.
In addition to energy, natural-resources funds invest in products that come out of the earth, directly or indirectly, such as paper and gold. They also can invest in chemicals.
While gold has been a winner for more than a year, energy stocks have been in a slump until about a month ago. (Click here for more on soaring gold funds.)
Back to basics
"With the economy bouncing back, there's good demand for energy," said Phil Flynn, an analyst with alaron.com, a commodities trading site.
Demand in oil and gas has picked up for several reasons. First, there are signs of growth in the manufacturing sector. As the business outlook improves for the big manufacturers, they need more fuel.
At the same time, OPEC cut production on Jan. 1 and may vote to continue the reduction at its next meeting March 15, Flynn said. OPEC is also trying to convince Russia to tighten oil production. Less oil in circulation could mean higher prices.
Investors have also been worried about the prospect of U.S. military action in Iraq. During the Gulf War, oil soared to a record $40 a barrel. Oil, which slid as low as $17 a barrel toward the end of 2001, is back up to $22 a barrel.
"Energy stocks follow the commodity," said Steve Kornfeld, a manager of the Franklin Natural Resources Fund. The fund, with about $100 million in assets, is up about 5.1 percent this year and invests about 62 percent of its assets in energy, Morningstar said.
Kornfeld said investors are looking for stability, moving towards solid oil companies and oil services. "It's a reversion back to traditional investing." The two top holdings as of Dec. 31 were Conoco (COC: up $0.07 to $27.97, Research, Estimates) and Exxon Mobil (XOM: up $0.65 to $42.65, Research, Estimates), Morningstar said.
Hot stocks in energy
Derek van Eck, manager of Van Eck Global Hard Assets Fund, said energy is one of his best-performing sectors. He has 30 percent of his portfolio in oil and gas stocks. The fund, with $50 million in assets, is up 9.6 percent this year.
He's seen an uptick in the past month in oil-services stocks like Smith International (SII: up $2.81 to $67.60, Research, Estimates) and Weatherford International (WFT: up $1.90 to $48.00, Research, Estimates).
van Eck has also had good luck with drilling company Santa Fe International (SDC: Research, Estimates) .
van Eck likes Apache Corp. (APA: up $0.75 to $54.00, Research, Estimates) and Anadarko Petroleum (APC: up $0.56 to $52.50, Research, Estimates).
A rapid turnaround
To be sure, it's been a quick rebound for energy, leaving many economists stunned, Flynn said. The Fed's rate cuts and President Bush's tax cut helped to put the economy in overdrive, leading to rising energy prices.
Still, fund investors should keep in mind that energy has historically been a volatile sector. So you don't want to transfer all of your 401(k) assets into an energy fund.
But there are smart ways to play the energy sector into a rebound. If you're a more timid investor, look for a solid diversified fund that invests in the sector. Funds from across the industry invest in energy, from large growth to small value, said Russ Kinnel, an analyst at Morningstar.
Some good picks include: ICAP Equity, a large value fund; MFS Mid-Cap Growth; or TCW Galileo Opportunity, a small blend. There's also Gabelli Westwood Equity and Berger Mid-Cap Value.
"It's a big enough sector that if you don't have any energy exposure, you probably should," Kinnel said.
You could also allocate a small portion of your portfolio to an energy sector fund with a good long-term record. There are about 15 funds that invest 75 percent or more of their assets in the sector, Kinnel said.
One choice is Invesco Energy, which has five-year annualized returns of 11.7 percent and has broad exposure in the sector, according to Morningstar. Vanguard Energy is another good option, with a 10-year annualized record of 13 percent. 
* Disclaimer
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