Hot sector pursuit
NEW YORK – With higher prices at the pump unavoidable, many investors would no doubt love to put some of the money lost to $4 gas back in their pockets.
But harnessing the gains in oil and gas can be harder than it might seem. Investors looking to tap the gains of the energy sector might be wise to consider mutual funds that are willing to give up on an investment even when it’s popular. They also might see less volatility by investing in companies tied into commodities rather than actually investing in oil itself, for example.
Jerry Jordan, portfolio manager of Jordan Opportunity Fund, which has big holdings in companies that help extract oil, said it’s important that investors and fund managers periodically re-evaluate the reasons why they’re invested. Failing to examine an investment with a skeptical eye can make it easy to miss a shift in the fundamentals that once might have made it a sound pick.
Jordan thinks energy prices might pull back in the short term but that they will continue to rise in the coming years because of burgeoning worldwide demand and inadequate infrastructure in the U.S. for refining oil and generating and transmitting electricity. But he said he’s been willing to prune his investments in energy or other sectors when he determined they had become overextended.
“We sold almost all of our energy shares in spring 2006 and bought them all back six months later. Our theme hadn’t changed but sometimes stocks just go nuts,” he said.
And trimming strong performers isn’t a notion limited to commodities.
“I sold two-thirds of my Google and all of my Apple position because I had big long-term gains. As much as I love Google – it was my single favorite technology stock, period – valuation still mattered. So I started by buying back my (Google) position in the high 400s and low 500s,” he said. Google is now trading above $550.
Even funds that mostly ply the commodities market benefit by reconsidering well-established ideas.
The RS Global Natural Resources Fund, with about $2.2 billion in assets, has enjoyed the ride in commodities in the past five years. The fund is up 14.7 percent this year and has logged an annualized return over the last three and five years of nearly 33 percent.
But its managers acknowledge that a pullback in the price of oil, for example, is possible so they look for investments that can weather that sort of decline.
“Our No. 1 focus is to make sure we preserve our shareholders’ capital,” said MacKenzie Davis, co-portolio manager.
The fund invests in some energy companies, for example, that might still do well if oil were to fall sharply. Rather than betting on oil at $130, they can invest in companies that still turn a profit if oil falls well off its recent highs.
“We think the approach to investing in natural resources is going to need to become more nuanced and differentiated,” he said.