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Value Line’s Energy/Natural Resources objective group contains funds that have a stated policy of investing at least 50% of their assets in oil and natural gas, energy services (including oil and gas drilling), chemicals, and forest products. Generally speaking, most funds in this group will have substantially over half of their assets invested in these industries. 

Note that this group does not include funds that invest in utilities, which could be confused with the term energy, or in precious metals funds, which one might consider a natural resource. Those two groups have their own objective groups and are subject to different dynamics. 

As with most broad-based groupings, there are index offerings in this space, such as Vanguard Energy Index Fund (VENAX). In addition to the index offering, Vanguard offers an actively managed fund: Vanguard Energy Fund (VGENX). Funds that focus on a subset of the broad group are also included, such as energy services, (Rydex Energy Services FundRYVIX), while others that take a broader focus (Franklin Natural ResourcesFRNRX). There are, of course, those that specifically invest across the globe (U.S. Global Investors Global Resources Fund; PSPFX). However, in reality, most funds in this space have a broader reach even if they only invest in U.S.-listed companies—Exxon Mobil (XOM - Free Exxon Stock Report), for example, has operations around the globe. 

That said, one fund that started the year off with an excellent beginning (through January 31, 2012) is Newgate Global Resources Fund A (NGGLX). This fund’s investment objectives are long-term growth of capital and protection against inflation and a declining U.S. dollar.

The fund invests in companies that are involved, either directly or through subsidiaries, in exploring, mining, drilling, refining, processing, transporting, distributing, fabricating, dealing in, or owning natural resources. The latter includes, but is not limited to, precious metals (e.g., gold, platinum, and silver); ferrous and nonferrous metals (e.g., iron, aluminum, and copper); strategic metals (e.g., uranium and titanium); hydrocarbons (e.g., coal, oil, and natural gas); chemicals; paper and forest products; food, textile, and tobacco products; and other basic commodities. In addition, the fund may invest in domestic and foreign securities, including depositary receipts and securities of companies located in emerging markets.

It invests in equity securities, including common stocks and convertible securities. Management is sanctioned to invest up to 15% of its net assets in derivative instruments, including options, futures contracts and options on futures contracts, synthetic instruments, and currency swaps. In addition to investments in equity securities, the fund invests up to 35% of its net assets in other investment companies, including exchange-traded funds. It may choose securities that are not publicly traded, but are eligible for purchase and sale by certain qualified institutional buyers. It also will hold up to 15% of its net assets can be allocated to illiquid securities. The fund may also invest up to 20% of its net assets in U.S. government obligations.

The investment process begins with a top-down, global economic assessment to identify undervalued sectors. Management uses fundamental analysis, investment experience, and professional judgment to evaluate the impact of current geopolitical and macroeconomic factors on the natural resources market and companies involved in the natural resources industry worldwide. The fund uses a bottom-up quantitative and fundamental analytic approach for security selection. The rigorous, bottom-up approach focuses on a combination of relative valuation analysis and strategic business evaluation. In addition to attractive price levels, management focuses on large-  and medium-capitalization companies with dominant market share, a high degree of financial transparency, and good corporate governance.

Another fund with a better-than-average year-to-date return through January 31, 2012, is JPMorgan Global Natural Resources Fund A (JGNAX). This fund seeks to provide long-term capital appreciation.

The fund may invest in securities of issuers located anywhere in the world and enjoys a significant position in emerging markets. Under normal circumstances, the fund intends to invest at least 40% of its total assets in countries other than the United States.

Within the natural resources sector, the fund generally invests a significant portion of its assets in the gold and precious metals, base metals, and energy sub-sectors. The fund may also invest in other sub-sectors, including, but not limited to, forestry products, diamonds, and soft commodities (commodities that are grown, rather than mined).

Management is not constrained by capitalization limits. At times, it may invest a significant portion of its assets in medium- and smaller-capitalization companies, where the fund believes that there are significant opportunities for investment returns. The equity and equity-like securities of companies in the natural resources sector in which the fund may invest include common stocks, preferred stocks, American Depositary Receipts (ADRs), Global Depositary Receipts (GDRs), American Depositary Shares (ADSs), other depositary receipts, convertible securities, warrants and rights, master limited partnerships (MLPs) and shares of investment companies, including exchange-traded funds (ETFs).

The fund may also invest up to 20% of its assets in equity or debt securities of any type of foreign or U.S. issuer or commodity-related securities, including pooled investment vehicles, such as grantor trusts, exchange-traded commodities (ETCs), or commodity pools or other instruments designed to produce returns relating to movements in prices of certain commodities or indices. The fund may use futures contracts, options, forwards, structured notes, and swaps to more effectively gain targeted equity exposure from its cash positions, to hedge various investments, for risk management, and to increase the fund’s gain.

The fund is non-diversified and its portfolio will be constructed predominantly through fundamental research and bottom-up stock selection. In analyzing companies in the natural resources sector, management examines a host of factors that may include the quality, experience, character, and reputation of management; the technical aspects of the company’s project(s); financing; ability/ plausibility of delivering the underlying product to the market; and valuation.

Allocation across the sub-sectors will vary according to which sector the fund believes offers the greatest potential for investment returns, based on management’s view of the current economic cycle. The allocation between sub-sectors can deviate substantially. There are no maximum or minimum limits as to the investment in each sub-sector. The size of individual holdings are determined based on valuations, potential for returns, perceived stock specific risk as well as diversification considerations. In an effort to manage risk generally, the fund will attempt to invest across various sub-sectors, regions, companies, and market capitalizations.

The fund generally sells securities if the adviser believes the issuer of such securities no longer meets certain investment criteria, if certain political and economic events occur, or if it believes that more-attractive opportunities are available.

A third fund with a relatively good year-to-date return (through January 31, 2012) is Nuveen Tradewinds Global Resources A (NTGAX). This fund’s investment objective is long-term capital appreciation. 

Under normal market conditions, the fund invests at least 80% of its net assets in equity securities issued by U.S. and non-U.S. natural resource-related companies. The fund invests at least 40% of its net assets in non-U.S. equity securities. It may invest up to 40% of its net assets in equity securities of companies located in emerging market countries. It invests in equity securities of companies located in at least three different countries, which may include the United States. No more than 35% of the fund’s net assets may be invested in equity securities of companies located in a single non-U.S. country. The fund’s investment strategy is not designed to track the performance of any specific benchmark.

In the table below, we have listed 10 top-performing funds, relative to the objective group, through January 31, 2012 that we follow in our Fund Advisor database.

 

10 Top Energy/Natural Resources Funds Performance

 

Fund Name

Ticker

% Year-to-date

Total Return

% 1 Month

Total

Return

% 3

Month

Total

Return

% 6 Month

Total

Return

% 5 Year

Total

Return

Annualized

 Newgate Global Resources Fund A

NGGLX

12.17

12.17

-1.80

-20.42

  

 JPMorgan Global natural Resources A

JGNAX

11.88

11.88

1.89

-12.10

  

 Nuveen Tradewinds Global Resource A

NTGAX

10.47

10.47

-1.02

-10.40

  

  

 Guinness Atkinson Alternate Energy Fund

GAAEX

9.93

9.93

-6.17

-31.26

-21.48

Aberdeen natural Resources A

GGNAX

9.20

9.20

5.60

-5.22

2.11

  

Firsthand Alternative Energy

ALTEX

9.15

9.15

-5.17

-28.49

  

Ivy Global Natural Resources A

IGNAX

8.90

8.90

2.10

-19.10

-0.88

J Hancock2 Natural Resources A

JNRAX

8.56

8.56

0.58

-13.04

  

 DWS Clean Technology

WRMAX

8.06

8.06

3.19

-9.54

  

 Alllianz RCM Global Resources A

ARMAX

7.94

7.94

3.19

-12.82

2.48

Energy/Natural Resources Objective Group

  

6.19

6.19

1.17

-12.19

2.27

  

At the time of this article's writing, the authors did not have positions in any of the funds mentioned.