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Energy funds may not be out of gas

There's widespread agreement oil prices are heading higher and so is volatility


Don't sell your soaring energy fund -- yet.

That's the advice of fund managers riding the soaring price of light sweet crude. Oil futures hit a stunning $64.27 (U.S.) early yesterday on the New York Mercantile Exchange, up about 40 per cent from a year ago.

There's widespread agreement volatility is here to stay and the balance of managers believe the price of oil is headed higher.

"You could see some very ridiculous prices in crude oil," said Charles Oliver, manager of the $296-million (Canadian) AGF Canadian Resources Fund. About 55 per cent of the fund is invested in the energy sector, a weighting that has helped it surge a heady 43 per cent in value for the 12-month period ended July 29.

"We are going to continue going to the pump and can expect to pay quite a bit more," Mr. Oliver said.

Meanwhile, Craig Porter, manager of the $130-million Altamira Resource Fund, up 33 per cent in value for the year ended June 30, said a jump to $70 (U.S.) a barrel is possible as energy demand climbs this fall.

Core economics of supply and demand are driving oil's lofty gains, according to some. After the 1970s energy crisis, the world's oil giants were on the hunt for new reserves. But in the eighties and nineties, the sector conserved cash and very little was sunk into exploration or development.

As a result, the oil market in 2005 is at a precarious balance: global producers pump out an estimated 85 million barrels of oil each day, yet the world consumes close to 83 million barrels.

That thin margin of two million barrels of oil means global events, both real and imagined, can play havoc with the price of crude. Fears of a terrorist strike in Saudi Arabia, the world's largest oil producer, and a slowdown in U.S. production pushed oil futures above $64 yesterday.

Resource funds with a heavy energy weighting have been a key beneficiary. Morningstar Canada reports that natural resources funds gained 8.2 per cent in July, the best of the 31 fund indexes tracked by the research firm. The energy-fuelled index is up 24.3 per cent in value so far this year.

The volatility has left many fund managers scratching their heads. Oil and energy stocks are the hot equity plays -- and one of the most speculative.

"There's nobody on this planet right now that professes to know where this is going," said George Morgan, manager of the $5.4-billion (Canadian) Templeton Growth Fund.

The value-driven fund is taking a conservative approach. About 12 per cent of the fund is made up of major integrated firms such as Royal Dutch Shell PLC and BP PLC, "big beefy profit machines" that Mr. Morgan expects can weather any downturn.

Similarly, Glenn MacNeill, manager of the Sentry Canadian Energy Growth Fund, is taking a defensive approach. The $22.2-million fund, up 43 per cent for the 12-month period ended June 30, owns a mix of blue-chip companies such as Shell Canada Ltd. and Talisman Energy Inc.

"I'm trying to concentrate on the names that have the best capital appreciation and the best liquidity," Mr. MacNeill said. "There is a floor [oil] price out there that's quite high . . . driven by fundamental supply-demand equations. That's kind of acting as a floor for our portfolio."

Gavin Graham, vice-president and director of investments at Guardian Group of Funds Ltd., advices investors to keep "a substantial portion" of their investments locked up in the resource sector.

Oil supply remains fixed, crude demand continues to grow and consumers, especially in North America, have yet to rethink energy consumption.

"People . . . are still buying SUVs, they are still running their air conditioners," Mr. Graham said. "This is a secular bull market. The price of oil is going to be higher for longer."

Top fuel-funds

Even with oil nearing $65 (U.S.) a barrel, it may still be too soon to sell your energy-based funds, at least according to portfolio managers like Charles Oliver of the AGF Canadian Resources Fund.

FundNet assets $million1 yr. Rtn3 yr Rtrn5 yr Rtrn% in Energy
CI Signature Canadian Resource$303.00 40.00%26.90%23.30%46.00%
AGF Canadian Resources296.24331.922.154.9
CIBC Energy180.363.344.626.275.7
CI Global Energy Corporate Class155.468.234.723.382.2
Altamira Resource13742.735.12047.2
Dynamic FocusPlus Resource88.326.32625.130.4
Dominion Equity Resource72.354.836.732.779.8
CIBC Canadian Resource65.547.626.216.766.9
Dynamic Global Resource23.443.636.42317.6
All-Canadian Resources Corp.0.417.311.411.8N.A.


© 2007 The Globe and Mail. All rights reserved.

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