A Vanguard for Energy Investors

03/25/2019 5:00 am EST

Focus: ENERGY

John Persinos

Managing Editor, Personal Finance

Vanguard Energy Fund Investors Shares (VGENX) is a good choice for investors who want exposure to the energy sector but with minimized risk, suggests John Persinos, editor of Personal Finance.

The fund invests in companies involved in the exploration, production, and transmission of oil and gas; the making and servicing of component products for energy activities such as drilling and oilfield services; energy research; and energy conservation or pollution control.

It is actively managed by Wellington Management Company, which uses a bottom-up approach that emphasizes fundamental investment value. The overriding goal is the potential for significant capital appreciation. The fund seeks energy companies with a history of earnings growth that’s resilient to economic cycles.

The energy players in the fund’s portfolio typically boast reasonable valuations, superb cash flow, huge cash hoards, untapped and vast crude oil and gas deposits, and robust balance sheets. Nearly 60% of holdings are based in the U.S. The holdings in the top 10 account for 44.1% of assets.

Indeed, a major advantage for VGENX is its exposure to mega-cap energy brand names, such as its top two holdings Exxon Mobil (XOM) and Chevron (CVX). These low-debt, exploration and production companies are appealing in terms of valuation and growth prospects.

Chevron is a holding in our Growth Portfolio. Even if economies and energy production slow down, Chevron is a diversified company with the proven capability of weathering cyclical ups and downs.

The fund’s third- and fifth-largest holdings, Total SA (TOT) and Marathon Petroleum (MPC) also occupy a place in our Growth Portfolio.

The shale production revolution in North America turned the U.S. into the world’s largest producer of oil. America actually dethroned Saudi Arabia as the king of oil producers, a landmark that we thought we’d never see in our lifetimes. With its preponderance of U.S.-based energy blue chips, VGENX is a play on this secular trend.

Battle-weary energy investors have been habitually overreacting to bad news and underreacting to good news. Geopolitical surprises, of which there have been many, only exacerbate the uncertainty and energy sector mood swings.

However, despite the short-term gyrations of crude prices this year, the multiyear trend is for continued demand for oil, especially in emerging markets where the rise of middle-class consumers is whetting appetites for a fossil-fuel dependent Western lifestyle.

Trying to precisely predict the price of oil is a fool’s game. Predictions for the price of oil are all over the map. Some analysts expect oil to shoot skyward, while others are calling for its further decline.

However, if you’re a patient, long-term investor, just remember one thing: Oil is the lifeblood of the modern industrial age; it’s the most important commodity in the world. That reality won’t change in your lifetime. Every portfolio should have exposure to the energy sector; VGENX is a convenient and safer way to get it.

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