Energy Funds Glowing Now

Sat., Nov. 9, 1996

Chet Currier Associated Press

In the often volatile world of specialized mutual funds, energy is the hot item right now.

Natural resources funds, a category of several dozen funds that concentrate on stocks of oil, gas and other industrial-commodity producers, boast the single biggest gain this year among all fund types.

From New Year’s through late October, they racked up an average return of 26.69 percent, according to Lipper Analytical Services Inc., while the average diversified U.S. stock fund was gaining 14.43 percent.

The natural resources group outpaced even the resurgent Latin America funds, which returned just a shade less than 24 percent.

“Oil and gas prices are rising,” says Jay Schabacker, editor of the Mutual Fund Investing newsletter in Potomac, Md., “and not because of Saddam Hussein’s antics.

“We’re actually responsible for these rising prices, thanks to our robust U.S. economy,” Schabacker says. “With gasoline inventories low and gas usage expected to remain high through the winter, I expect further price increases.”

Natural resource stocks, and the funds that specialize in them, have a long-standing reputation as inflation-linked investments that perform best when the cost of living is rising strongly. That image doesn’t fit this year, however, when inflation by most measures has remained subdued.

As the Morningstar Mutual Funds service observes in its latest appraisal of the group: “Natural resource funds are often viewed as inflation hedges, but their performance is largely dependent on supply-demand factors, which can be affected by economic strength, politics, weather and more.”

Their ability to diverge from other inflation-related investments has been clearly demonstrated in the past six months or so, as Morningstar numbers attest. Over a six-month period through early October, natural resource funds gained more than 9.5 percent while funds investing in precious metals were falling almost 8.5 percent.

There are more than a half dozen energy-specific funds, including offerings from each of the leading groups that sponsor sector funds - Fidelity, Vanguard and Invesco.

You should be aware going in, though, that just about any of these funds can be volatile. The more focused its managers are on a specific type of stock, the more extreme that volatility may be.

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