Energy Sector Funds: High Gains Are Unlikely to Continue

June 25 2004 -- Despite rises in oil prices, energy sector funds are unlikely to show growing returns in the near term. Though the energy sector has favorable prospects over the longer term, funds investing in stocks of energy companies can be very volatile.

"We expect year-over-year earnings gains for energy stocks to decelerate in the years ahead," said Sam Stovall, chief investment strategist for Standard & Poor's. "From a sector standpoint, Standard & Poor's has a market weighting in energy, and in general, we feel energy stocks are fairly valued."

Going forward, energy stock gains are likely to moderate because of the "definite possibility" that oil prices will decline, Stovall added. However, it is believed that the long-term prospects for the energy sector are favorable due to increased production in Saudi Arabia and Russia and heightened demand in China and the U.S.

"We believe as energy prices pull back, oil stocks have the potential to pull back or underperform," said Fred Sturm, manager of Ivy Global Natural Resources/A (IGNAX). Though he says oil service stocks may trend higher as increased spending on oil exploration spurs revenue growth for oil service companies, he finds they "aren't cheap at current levels." Typically, half of the Ivy portfolio is invested in energy stocks, and half in basic materials stocks. For the one-year period through last month, Ivy Global Natural Resources rose 39.9%.

While oil prices have soared this year, energy sector funds have only moderately outpaced the broader market. For the one-year period through last month, energy sector funds rose 19.9%, versus a 18.23% gain for the S&P 500. But for longer periods, specifically past five years, energy sector funds have outperformed the S&P 500. On an annualized basis, they rose 7.64% for the five-year period through last month, versus a 1.52% loss for the S&P 500.

Energy investments can provide attractive returns over the long term, but funds investing in the sector are much more volatile than the broader market. Energy sector funds have a three-year standard deviation of 23.08%, versus 16.51% for the S&P 500. Like all specialty funds investing in a single sector, they should be handled with care.

"As a whole, the energy sector is fairly valued," said J.C. Waller III, manager of ICON Energy (ICENX). Waller said his fund, the best-performing energy sector fund for the one-year period through last month, gained by avoiding dominant companies in the integrated oil and gas industry group. Looking ahead, he expects oil and gas refining and marketing stocks will be the strongest.

Although energy prices aren't likely to fall rapidly, the market anticipates lower prices, said Bill Cashman, manager of UMB Scout Energy Fund (UMBEX). He feels valuations on some stocks may have peaked.

Energy Fund Benchmarks* One-Year Returns (%)* Three-Year

Annualized

Returns (%)*

Five-Year

Annualized

Returns (%)*

Standard

Deviation (%)*

Energy Sector Funds +19.91% -2.35% +7.64% 23.08%
S&P 500-Stock Index +18.23% -2.14% -1.52% 16.51%
S&P Global 1200-Energy Index +26.44% +3.94% +5.97% 17.04%
Energy Sector Funds Ranked by

One-Year Returns*

One-Year

Returns (%)*

Three-Year

Annualized

Returns (%)*

Five-Year

Annualized

Returns (%)*

Standard

Deviation (%)*

ICON Energy (ICENX) +30.23% +7.37% +21.49% 21.97%
Munder Funds Power Plus/Y (MPFYX) +29.54% -7.48% N/A 29.27%
Vanguard Energy (VGENX) +29.52% +9.24% +14.13% 17.61%
UMB Scout Energy Fund (UMBEX) +24.53% +4.22% +5.41% 16.40%
Putnam Global Natural Resources Fd/A (EBERX) +24.20% +3.47% +7.01% 17.38%
Excelsior Energy and Natural Resources Fund (UMESX) +22.60% +0.40% +8.95% 19.71%
Rydex Energy Fund/Inv (RYEIX) +21.29% -0.63% +4.36% 18.93%
INVESCO Energy Fund/Inv (FSTEX) +18.29% +0.50% +12.76% 22.07%
Fidelity Select Energy (FSENX) +18.21% -0.12% +7.14% 17.89%
Saratoga Energy & Basic Materials/A (SBMBX) +16.37% -4.18% +6.54% 23.04%
Strong Energy Fund (SENGX) +15.22% -2.44% +7.25% 21.03%
Rydex Energy Services Fund/Inv (RYVIX) +1.99% -11.38% +1.53% 30.38%
Fidelity Select Energy Service (FSESX) -1.3% -5.08% +9.88% 32.41%

*Source: Standard & Poor's. Data as of 5/28/04. Total returns are in U.S. dollars and include reinvested dividends. Standard deviations are based on the recent three-year period.

Contact Robert F. Keane with questions or comments at:

bkeane@ia-mag.com.

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