Last month we purchased Fidelity Limited Term Bond (FJRLX) in our model portfolio. Part of our strat...
Cheap Energy Fund Extracts Rich Returns
03/21/2011 1:46 pm EST
The Vanguard Energy Fund’s value-oriented portfolio has tended to cream the competition for a fraction of its fees, write Rob Wherry and Russel Kinnel in Morningstar FundInvestor.
The Vanguard Energy Fund (VGENX) is a solid option for investors looking to get exposure to the energy sector.
Lead manager Karl Bandtel, a 30-year veteran, favors well-run energy companies with decent growth rates, little debt, and cheap valuations. That’s reflected in the fact that this fund’s average holding has an estimated growth rate comparable to the category average—but trades at 13 times earnings, versus 15 times for the peer group.
Bandtel also focuses on minimizing risk by tilting the portfolio toward large-cap, integrated oil firms, such as ExxonMobil (XOM), that are less susceptible to swings in commodity prices than smaller industry players. Occidental Petroleum (OXY) and Chevron (CVX) are the next biggest holdings. The fund has almost 90% of its assets in giant- and large-cap stocks, versus 63% for its peers.
Bandtel also keeps the portfolio diversified with 113 holdings that span most energy sectors. All that has helped this fund keep a favorable risk/reward profile over the long haul.
The fund’s 15.1% average annual return over the trailing decade outpaces 80% of its competitors. A $10,000 investment made 10 years ago would have grown fourfold, compared with just a $2,000 gain from owning a plain-vanilla S&P 500 Index fund.
[See Four Funds Making a Mint on Commodities, including Fidelity’s energy-services offering.]
Oil Spill Proved Costly
Recently, though, the fund has stumbled because of the Deepwater Horizon oil spill in the Gulf of Mexico. Bandtel admits he was slow to react to the accident, even though the fund has sizable positions in companies at the center of the spill—BP (BP), Anadarko (APC), and Transocean (RIG).
Instead of cutting the fund’s losses, Bandtel and his team looked at a range of possible outcomes and decided to hold the stocks as they fell in value and even added to some. The fund lagged the category average in the first half of 2010, and its 13.4% gain for the calendar year landed it in the bottom 20% of the category—a position it hadn’t been in for any of the previous ten years.
However, the long-term record remains strong, and the fund is outperforming 78% of its peers so far in 2011.
Vanguard Energy is a good steward of shareholder cash. The parent firm has a solid reputation for being shareholder-friendly. In the past, Vanguard has closed this fund to help control asset flows. (At $13.6 billion, it dwarfs its competitors.)
The fund is currently open to new investors, but its $25,000 minimum investment helps prevent hot money from quickly entering and exiting. In addition, Bandtel has between $500,000 and $1 million invested in the fund.
It’s difficult to beat Vanguard when it comes to fees. And this fund is no exception. It levies a 0.38% annual expense ratio, compared with 1.71% for the category average. If you can make it to the $50,000 Admiral minimum, you can get the mutual fund for an expense ratio of 0.31%.
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