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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 energy and/or natural resource-related companies.  Generally speaking, most funds in this group will have substantially more than half of their assets in companies involved with such things as oil and natural gas, energy services (such as oil and gas drilling), chemicals, and forest products. 

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 often-different dynamics. 

As with most broad-based groupings, there are index offerings in this space, such as Vanguard Energy Index Fund (VENAX), though it is interesting to note that Vanguard also offers an actively managed fund here (Vanguard Energy Fund;VGENX) in addition to the index offering, which helps to highlight the diversity, and potential opportunity, of the group.  Indeed, there are funds that focus on a subset of the broad groups, such as energy services companies, (Rydex Energy Services FundRYVIX), and others that take a broader focus (Franklin Natural ResourcesFRNRX).  There are, of course, funds that specifically invest across the globe (U.S. Global Investors Global Resources FundPSPFX), though in practicality most of the funds in this space have a broader reach even if they only invest in U.S.-listed companies—Exxon Mobil (XOM), for example, has operations around the globe.

The Energy/Natural Resources objective group, however, generally invests in things that we need for everyday living.  And while this may provide long-term benefits, many stocks here are subject to price swings based on frequently volatile commodity prices.  So, while this group may interest conservative investors because of the basic need for its products, it is not for the faint of heart and probably shouldn’t make up a large chunk of an investor’s portfolio.  That said, the commodity exposure of the securities in which these funds invest often provides an inflation hedge and, at times, a safe haven when investors flock to “hard assets”.

Over the long term, the Energy/Natural Resources objective group has been a very strong performer relative to the broader market, as measured by the S&P 500 Index.  For the 10-year period ended May 31, 2010, the group had an annualized return of 9.5%, while the S&P 500 reported an annualized loss of 0.9%.  For five years and three years, the group had a gain of 6.8% and a loss of 8.3% respectively, while the S&P 500 reported annualized returns of 0.2% and –8.9% respectively.  During the past year, however, the Energy/Natural Resources Equity group reported a return of 4.5% compared with 21.0% for the S&P 500.  The Energy/Natural Resources Equity objective group currently has a standard deviation of 20.76 and a Beta of 1.00.  This higher-than-average volatility reflects the turmoil that many Energy/Natural Resource companies have experienced over the past three years.  Thus, the group carries our highest Risk Rank of 5, indicating that funds in this group might not appeal to conservative investors.  That said, there is a benefit in owning energy funds as a diversifying investment and as a hedge against inflation.

Year to date through May 31, 2010, the Energy/Natural Resources objective group has performed poorly, as compared to the broader market, underperforming the S&P 500.  It reported a loss of 9.7% compared with a loss of 1.5% for the S&P.  All funds in the group have a year-to-date loss, including the top performers.

That said, one fund with a relatively good year-to-date (through May 31, 2010) return is RS Global Natural Resources Fund A (RSNRX).  This fund’s investment objective is long-term capital appreciation. 

The fund pursues this objective, under normal market conditions, by investing at least 80% of its assets in the equities of companies principally engaged in natural resources industries.  These companies may be located anywhere in the world, but the fund will normally invest in companies located in at least three countries, which may include the United States.  The natural resources sector includes, but is not limited to, industries such as integrated oil, oil and gas exploration and production, energy services and technology, metals production, forest products, paper products, chemicals, building materials, coal, alternative energy sources, and environmental services. 

The fund identifies companies and industries that appear to have the potential for above-average long-term performance based on projections of supply and demand of a resource. It also seeks to identify those companies trading below management’s estimate of their true worth, and has a preference for smaller-capitalization firms.  Finally, derivatives may be used to reduce investment and currency risk.

Another fund with a good relative year-to-date return compared with its group is Nuveen Tradewinds Global Resources Fund (NTGAX).  This fund’s investment objective is long-term capital appreciation. 

To achieve this objective, under normal market conditions, the fund invests at least 80% of its assets in equity securities of global energy and natural resources companies and companies in associated businesses.  The fund will invest at least 40% of its assets in non-U.S. equity securities.  It may invest up to 40% of assets in securities of companies located in emerging market countries.  It will normally invest in securities of companies located in at least three different countries, including the U.S.  No more than 35% of the fund’s assets may be invested in securities located in a single non-U.S. country.  The fund uses bottom-up fundamental research.  It strives to own undervalued securities that possess opportunities misperceived by the market. 

A third fund with a relatively good year-to-date return is U.S. Global Investors Global Resources Fund. This fund’s objective is to seek long-term growth of capital plus protection against inflation and monetary instability. 

To achieve this objective, under normal market conditions, the fund invests at least 80% of its assets in the securities of companies involved in the natural resources industries.  These include natural gas, integrated oil, oil and gas drilling, oil and gas exploration and production, oil and gas refining, oilfield equipment/services, aluminum, chemicals, diversified metals and coal mining, iron and steel, paper and forest products, and uranium. 

As of May 31, 2010, the fund held approximately 40% of its assets in oil exploration and production, 12% in integrated oil companies, 9% in oil field services, and  5% in oil and gas drilling.

In the table below, we have listed 10 top-performing funds through May 31, 2010 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

RS Global Natural Resources A

RSNRX 

-0.87

-6.46

1.47

2.91

9.17

 

Nuveen Tradewinds Global Resources A

 

NTGAX 

-2.99

-8.59

0.35

-2.38

 

US Global Investors Global Resources

PSPFX 

-3.84

-11.45

-2.52

-1.05

6.96

 

Blackrock All-Cap Energy & Resources A

BACAX 

-5.60

-10.35

-5.31

-1.33

9.93

Franklin Natural Resources A

FRNRX 

-5.99

-11.95

-5.17

-2.96

8.79

Saratoga Energy & Basic Materials A

SBMBX 

-6.21

-14.76

-8.12

-1.13

4.89

Blackrock Natural Resources A

MDGRX 

-6.88

-9.27

-4.31

-3.63

8.82

Prudential Jennison Natural Resources A

PGNAX 

-6.91

-9.98

-3.45

-4.04

14.28

Ivy Energy A

IEYAX 

-8.03

-12.04

-7.18

-3.91

 

Dreyfus Natural Resources A

DNLAX 

-8.05

-10.69

-4.60

-5.33

6.12

Energy/Natural Resources Objective Group

 

-9.66

-11.87

-6.75

-6.34

6.82