Take care in tanking up on energy funds

What a difference a weekend can make. At the end of June, before revelers began celebrating the July 4 holiday period, mutual-fund watcher Scott Cooley would have expected continued strong market performance from international oil firms such as Texaco, Exxon-Mobil, or BP Amoco.

But by the end of last week, after the holiday, the energy market - and oil stocks - suddenly looked quite different, thanks to a decision by just one country: Saudi Arabia.

Last Monday, officials of the No. 1 oil-producing nation hinted that they might boost crude-oil production to bring down oil prices from the $30 a barrel range to the $25 range. Whether the Saudis' actually follow through on their promise or not, the impact was immediate: Crude-oil futures (which reflect contracts on future deliveries) dropped nearly $2.

The change in the price outlook underscores the complexity of the entire natural-resources/energy segment of the stock market, says Mr. Cooley, an analyst for Morningstar Inc., in Chicago.

To take advantage of market gains in natural-resources stocks, you have to be in the exact right place at the exact right time, says Cooley. That means if oil prices suddenly rise, you have to have a presence in the commodity. Conversely, if oil prices suddenly sag, you have to make certain that you are not overexposed.

"Average investors should have a small stake of around 5 percent of their overall portfolio in natural-resource stocks," says Cooley. "But the best way to do that," he says, "is to own a broad-based natural resources/energy fund - or have very tiny positions in two or three funds that capture a theme, such as oil exploration, oil-service firms, and refining companies."

Funds Cooley admires include T. Rowe Price's New Era Fund, a no-load fund, and Oppenheimer Real Asset Fund, which carries a load of 5.75 percent.

The T. Rowe Price fund, for example, frequently invests in not just oil and gas stocks, but diversified metals, paper and forest products, and chemicals. Charles Noh, an analyst for Value Line in New York, calls the fund an "inflation hedge," given its broad exposure to diverse types of commodities and resources.

The Oppenheimer fund also invests in a broad range of sectors, including precious metals, petroleum, natural gas, livestock, and agriculture.

The energy sector is riddled with often contradictory cross-currents. Investment house Donaldson, Lufkin & Jenrette, for example, sees electric-power distribution companies and big oil firms like BP Amoco and Texaco just holding their own in terms of market performance. But other subsections, such as independent power companies and natural gas firms, are expected to outperform the market.

Outside the energy sector, chemical firms are expected to underperform in the period ahead, even as the paper and forest product sector has the potential to outperform the market, according to analysts for DLJ.

The bottom line: Unless you are an expert in natural-resources stocks, the best move is to diversify within this sector. Finally, Cooley notes, if you decide to link together several sector funds, then go with a major investment firm such as Fidelity that offer "select" funds, usually carrying a small front-end load. According to Value Line, Fidelity had four of the Top 10 performing natural resource funds during the past three years, including the top-ranked fund: Fidelity Select Energy Service.

But remember, if you suddenly decide to pull out of a select fund because of changes in the economy, you will probably be socked with a redemption fee.

(c) Copyright 2000. The Christian Science Publishing Society