We’ve had a cold, miserable winter. The Middle East is in turmoil, and the price of oil and gas is up. It all adds up to making it a great time for mutual funds invested in oil and natural gas shares.
In short, 2002 was a banner year for the natural resources fund category because oil prices rose more than 60%. As a result, funds invested in energy companies managed a -.68% total return in 2002, compared to -22.1% for the Standard & Poor’s 500 index, according to Morningstar. Funds invested in large-cap growth companies, meanwhile, fell a woeful 27.73% over the same stretch, while large-value funds slid 18.87%.
As with any investment, however, there are reasons to be cautious. Morningstar analyst Langdon Healy says that while prospects in the energy industry may be positive for the short-term, the sector remains notoriously volatile. Healy says that investors who opt for energy-heavy or natural resource funds shouldn’t devote more than 10% of their portfolio to such a position.
For the best funds to consider, we screened Morningstar’s
database of 79 natural resource portfolios, ranking the results by three-year average annual returns. We eliminated candidates whose returns for 2001, a down year, were off 20% or more. We also avoided funds whose results swung too widely over the years. Healy says three picks in particular were appealing, and he notes that the risk profile increases for each selection mentioned. First, the T. Rowe Price New Era (TRMEX; 800-638-5660), which is a top 10 rated fund, offers a diversified portfolio that mixes oil and gas stocks with companies in industries such as forestry, mining, and chemicals. The fund managed a -6.3% total return last year and an average annual return of 2.5% over the three-year period ending Dec. 31, 2002.A second choice is the Vanguard Energy fund (VGENX). Healy says the fund’s focus is more narrowly cast upon oil and natural stocks. The fund’s money managers look for out-of-favor picks that have potential for upside, yet remain inexpensive relative to the industry group. The fund slipped slightly with a -1.6% total return in 2002, but averaged 9.4% a year over the three-year period ending Dec. 31, 2002.
Finally, a more aggressive choice is the Invesco Energy Fund (FSTEX), a portfolio stocked with oil and gas selections. Healy says the fund’s manager is a former petroleum engineer whose understanding of the industry comes from firsthand experience. Invesco’s fund finished 2002 with a -5% total return, yet provided investors with an average 7.2% a year in the 36 months ending Dec. 31, 2002.
Top Natural Resource Mutual Funds
| Fund Name (Ticker) | 1-Year Return* |
3-Year Return* |
5-Year Return* |
Phone Number |
Minimum Investment |
| State St Res Glob Res A (SSGRX) | 5.00 | 23.40 | 2.25 | 800-882-0052 | $2,500 |
| Prudential Natural Res B (PRGNX) | 19.15 | 10.73 | 9.88 | 800-225-1852 | 1,000 |
| Ivy Global Natural Res A (IGNAX) | 4.67 | 9.89 | 5.74 | 800-456-5111 | 1,000 |
| Vanguard Energy (VGENX) | -1.60 | 9.37 | 4.69 | 800-662-7447 | 3,000 |
| Merrill Lynch Natural Res B (MBGRX) | 0.05 | 7.84 | 5.61 | 866-275-6546 | 1,000 |
| Invesco Energy INV (FSTEX) | -4.32 | 7.98 | 5.21 | valign=”middle”>800-646-8372 | 1,000 |
| *AS OF DEC. 31, 2002. BASED ON TOTAL ANNUAL RETURN. SOURCE: MORNINGSTAR INC. |
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