Small Better For ‘96 Winner

Past performance is no guarantee of future success.

That’s what investors in State Street Research & Management’s Global Resources Fund should remember as the fund ends the year as the top-performing mutual fund in the country.

The $117 million fund, run by Daniel Rice, bets on small-capitalization energy companies that this year saw their stocks rocket ahead of most other companies’ shares. The fund jumped 70 percent for the year through Dec. 24, making it No. 1 out of the 4,812 U.S. mutual funds tracked by Bloomberg Fund Performance.

Because of its exclusive focus on energy, the fund’s performance is heavily dependent on the prices of oil, which has had one of its best years in a decade, and natural gas, which is near all-time highs.

A variety of factors in the oil patch, including moderating weather, which slows demand for heating fuels, as well as increased production worldwide and the limited return of Iraqi oil exports could conspire to shake the fund’s future performance.

This year, the fund also benefited from merger mania among energy companies, as four of its top 10 holdings - Phoenix Resource Cos., Global Natural Resources Inc., Nowsco Well Service Ltd. and Landmark Graphics Corp. - were objects of buyouts. That’s a record that would be tough to match in 1997.

The fund’s performance, its high-flying manager says, shouldn’t be too shabby next year, though, because he expects earnings for smaller oil and gas companies to remain strong.

“There’s further room for growth,” he said. He estimates that if oil prices average $20 a barrel in 1997, down from $24.92 today, and natural gas averages $2.00 for each million British thermal units, below $3.384 today, the earnings of the companies in his portfolio will grow by 20 percent to 25 percent. That compares with 5 percent to 10 percent annual growth for large oil companies like Amoco Corp. and Exxon Corp.

The smaller companies he likes are also cheaper than both stocks in general and larger oil and gas companies, Rice said.

While the Amocos and Exxons of the world sell at eight times next year’s cash flow, these smaller companies are selling around six times cash flow, and the companies in the Standard & Poor’s 500 Index are selling at about 10 times.