We've made several changes in our model portfolio to increase our margin of safety amid the market v...
A Vanguard in Energy
04/27/2015 12:00 am EST
Oil prices have been cut almost in half since last July; that’s made a lot of investors nervous and we continue to hear more bad news than good about oil, observes Benjamin Shepherd, editor of Personal Finance.
But we don't believe that prices will remain this low. Economists estimate that to meet demand the world will need somewhere between 10 million and 25 million barrels per day of additional production over the next 15 years.
Those may be wide-ranging estimates, but the bottom line remains the same: The world needs more oil.
The sector’s volatility has its upside as it creates bargains in a beaten-down industry. Karl Bandtel and his team at Vanguard Energy Investor (VGENX) know this and are certainly taking advantage of those cut-rate prices.
Bandtel favors exploration and production companies and prefers to own solid companies that he can hold long-term rather than go fishing for the one that might strike it rich with the next big find.
Big-name oil companies that do a bit of everything (from exploration to refining to distribution)—such as Exxon Mobil (XOM) and Chevron (CVX)—also figure largely into his investment strategy, clocking in at 38.4% of assets.
The fund team aims to purchase energy and energy-related stocks at discounts to their intrinsic value; the market’s sell-off has offered a wonderful opportunity to carry out this strategy.
The fund also has a new stake in Beijing Enterprises Holding (BJINY); while the average energy sector fund only invests about 15% of assets internationally, Vanguard Energy socks away 31% into foreign stocks.
That greater international diversification, coupled with Bandtel’s preference for buying big, stable companies at a discount, helps tamp down what could otherwise be a lot of volatility.
With an annual turnover of just 17%—compared with the category average of 81%—the fund doesn’t cycle in and out of hot stocks, either.
Over the long haul, though, the fund ranked near the top of its category over the past decade with an average annualized return exceeding 6%, thanks to its portfolio stability and a low 0.38% expense ratio. Its 15-year return is an annualized 11.1%.
So there’s nothing particularly sexy buried in the fund’s holdings. But its focus on companies that pump day in and day out, regardless of oil prices, makes Vanguard Energy one of the best energy-focused mutual funds.
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