Record high oil and gas prices helped prolong the strong performance from energy-heavy mutual funds in the first half of 2008.
The best performing mutual funds over that period are topped up with oil and natural gas holdings, and broader equity funds that loaded up on energy stocks have outperformed most of the more than 2,400 funds on the market that hold at least $25-million in assets.
In a six-month period that saw the price of crude oil climb more than 50 per cent and natural gas skyrocket nearly 70 per cent, fund managers that remained bullish on energy were handsomely rewarded.
Of the funds that are widely available to retail investors, the best performer was the Enervest Natural Resources Fund, with a return of 42 per cent. It's classified as a natural resources equity fund, but portfolio manager Greg Bay from Cypress Capital Management Ltd. holds Canadian energy stocks exclusively - mostly small- and mid-cap - including Nexen Inc., Southern Pacific Resources Corp. and OPTI Canada Inc.
"We still think the sector looks reasonably attractive," said Mr. Bay, who has priced in an average crude oil price of $100 (U.S.) a barrel and natural gas at $9.50 per million British thermal units for 2008. Oil is currently trading at $144 and natural gas fetches $12.08 per million BTU.
He said a weak U.S. dollar combined with basic supply and demand fundamentals will keep energy prices, and energy stocks, high. "Costs have gone up and [oil and gas are] getting more difficult to find."
The Dynamic FocusPlus Energy Income Trust Fund is close behind with a return of 39.2 per cent in the first half of the year. It's also classified as a natural resources equity fund, but Canadian energy trusts dominate the $527-million portfolio, including Vermillion Energy, Bonavista Energy and Crescent Point Energy.
"I think we will maintain our strategy into the second half of the year," said Goodman & Co. Investment Counsel Ltd. co-manager Andrew Taylor, who dismisses the notion the energy sector has peaked. "We are long-term bulls on the outlook for both crude oil and natural gas."
To hedge against that volatility, Goodman & Co. focuses on income trusts with good management and strong financial statements. "The most important focus is on finding the right companies," he said. "Over an extended period of time, we believe those names should outperform."
Any fund focusing on income trusts, however, takes on added risk because new rules will strip trusts of their special tax status in 2011 - and that could eat into earnings. Mr. Taylor says the coming change is already worked into market prices and the transition will be smooth. "We would expect that many of the trusts will convert back to high dividend-paying corporations."
Funds with heavy weightings in mining stocks trailed energy funds but fared well in the first half of 2008, thanks to strong metal and mineral prices. Looking at all fund classes, 42 of the top 50 performers are commodity related.
Alternative strategy fund Sprott Hedge L.P. II-CI A gained 28 per cent on the strength of resource stocks. The top performing Canadian equity fund, EcFlx Canadian Equity returned 15.3 per cent with a 60-per-cent weighting in energy and materials stocks.
But while commodity prices continue to hit record highs, there's growing concern over the lag in related stock prices For example, while oil advanced 50 per cent and natural gas surged 70 per cent in the first half of the year, the S&P/TSX energy index only gained 26.8 per cent.
Some money managers and research analysts say oil and natural gas have risen too much too fast, and it's a sign investors are not convinced current prices are sustainable. "A lot of fundamentals suggest that prices are likely to come lower," said Canadian market strategist Kate Warne from Edward Jones & Co.
Edward Jones is recommending clients dramatically lighten their energy holdings to 11 per cent from the current S&P/TSX composite weighting of 33 per cent. "We think that the commodity risk right now is so high that most investors would be better off putting money in other places - keeping some in energy, but not as much," Ms. Warne said.
The adage that what comes up must come down is strikingly true when you turn the six-month performance picture upside down. The worst performers are dominated by former high-flying emerging market funds.
The Excel India fund lost 38.7 per cent of its value while still maintaining an average annual gain of 22.7 per cent over the past five years. The HSBC Chinese Equity-I fund took a 30-per-cent dive but still holds a five-year average annual return of 22.3 per cent.
Top performing mutual funds in first half of 2008 (with at least $25-million in assets)
Resolute Performance: 51.6%
MSP 2007 Resource LP: 43.8%
Enervest Natural Resources Fund: 42.1%
Dynamic Focusplus Energy Income Trust: 39.2%
Sprott Energy: 37.2%
Worst performing mutual funds in first half of 2008 (with at least $25-million in assets)
Excel India: -38.7%
Excel Chindia: -32.5%
AIC American Advantage: -29.7%
HSBC Chinese Equity-I: -28.8%
Excel China: -28%
KATHRYN TAM/THE GLOBE AND MAIL
Dale Jackson is a producer at Business News Network.
This article first appeared in
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