Developing your energy fund portfolio: even though the stock market has touched bear territory, investors can discover a gusher of profits through these high-octane investments

Black Enterprise, Oct, 2008 by Donald Jay Korn

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"OIL AND GAS PRICES ARE AT RECORD highs and there's no relief in sight," says Bryan K. Robinson, 38, an account manager for REACH Media, parent company of the nationally syndicated radio program The Tom Joyner Morning Show. Most people lament the fact that gas prices continue to hover close to $4 a gallon. But Robinson isn't hurting from prices at the pump as much as most people are.

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The Piano, Texas, resident has spent most of his career in the oil patch states of Texas and Oklahoma where such production is always a major topic of conversation. Recent discussions have convinced him that the energy crisis will be around for a spell. "The demand for energy is growing faster than the supply," says Robinson, "and that situation is not changing. If you want high returns, energy is the logical place to be."

Oklahoma City-based financial planner Kathy Williams, who advises Robinson, is similarly bullish on energy investing. "People haven't adjusted their behavior to higher oil prices," she says. Until demand falls steeply, she believes prices will stay up and energy companies will make money.

Robinson has about 15% of his portfolio in Jennison Natural Resources (PGNAX), which has produced an annualized return of 22% over the past 10 years. Nearly 70% of its assets are in oil and-gas stocks such as Southwestern Energy (SWN) and Suncor Energy (SU), two companies involved in exploration and production. "This fund's expense ratio has come down in recent years so costs are low for a natural resources fund," says Williams. "Considering its outstanding record, this is a solid choice."

THERE WILL BE FUNDS

At the beginning of 2008, mutual fund investors could be optimistic. Even though the stock market was down from record highs set in late 2007, mutual funds wound up with gains for the fifth consecutive year. The good times, it seemed, were still rolling.

The first half of this year proved to be the rock after the roll. With recession fears rising and credit markets in turmoil, the average stock fund lost more than 10% while others posted losses of more than 25%. Bond funds reported narrow losses as well.

Amid all the gloom, natural resources funds emerged the dear winner, gaining more than 16% in the first half of the year. In fact, most of these funds invest heavily in oil and natural gas. With oil gushing to more than $140 a barrel by the end of the second quarter, energy companies, which represent a significant portion of their holdings, posted huge profits.

Indeed, the recent surge in oil prices may represent a major turning point for investors. Even if prices retreat to, say, $100 a barrel, they still will be much higher than in 2006 or 2007. Trillions of additional dollars are moving from consumers' pockets to oil companies and oil-producing nations. If those entities are held by your funds, some of the dollars you're now spending at the pump may find their way back into your pocket.

PROSPECTING FOR RETURNS

To find such opportunities, BLACK ENTERPRISE has developed this year's Moneywise 100--our semi annual ranking of the best mutual funds--to focus on energy Ranked by five-year total returns, we identified 100 top-performing funds across 12 categories with portfolios that have significant holdings in companies that produce off, natural gas, and other energy-related products. (See chart in this feature.)

Our editors interviewed more than a score of experts on the best way for you to engage in oil exploration. Here's what they advise.

Pore over your portfolio. When searching for energy exposure, the first step is to check out your existing holdings. You may already possess some energy companies. That's certainly true for Vernell King Sr., a 65-year-old retiree who worked as a manager for Mobil and then the merged entity, ExxonMobil (XOM), for 35 years. When he retired three years ago, most of his investment portfolio was in ExxonMobil stock. "ExxonMobil is a well-run company," says King. "[It] had problems in the past when it did things like buy Montgomery Ward, but ExxonMobil is taking care of its basic business now. One reason I like ExxonMobil is its big position in natural gas. Natural gas has a great future. It may replace diesel for truck fuel."

Such enthusiasm has not been misplaced. Shares of ExxonMobil traded around $32 in mid-2003 and rose to about $88 in mid-2008, a gain of about 175%. Nevertheless, there's the chance that oil prices-and ExxonMobil's stock-may slide.

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Admits Deborah A. Jordan, a financial planner with Ameriprise Financial in Williamsville, New York, who advises King: "He was too exposed to the stock market in general and to one company in particular."

To reduce his exposure, she suggested King sell some of his stock and reinvest the proceeds. He now has less than half his portfolio in ExxonMobil and the balance is held in five bond funds, including Eaton Vance Floating Rate A (EVBLX) and Fidelity Advisor Strategic Income T (FSIAX). He also has one B share of Warren Buffet's Berkshire Hathaway (BRKB), which recently traded at $3,883. "The mutual funds give me a more diverse portfolios," says King.