U.S. stock funds with big bets on the stars of the American shale-energy boom have taken a beating recently amid plunging oil prices. In response, portfolio managers say they are turning an eye back toward big, integrated oil stocks, which have weathered the energy sector sell-off better for the most part.
The strong balance sheets and diversified global operations of majors like Exxon Mobil Corp, Chevron Corp and BP plc, have sheltered index funds and some active portfolio managers from the worst of a volatile ride on energy markets, where oil prices have plunged 21 percent since early August.
The $33 billion Ivy Asset Strategy Fund added 2.6 million Exxon shares during the six months that ended Sept. 30, while many other funds saw their exposure to Exxon increase because its stock outperformed smaller energy peers.
"You don't always want to be driving 100 miles an hour," said John Dowd, co-manager of the $2.4 billion Fidelity Select Energy Portfolio, referring to jumping into high-growth energy stocks.
Dowd's fund is a case in point. While it's down 10.95 percent over the past three months, it's still beating 73 percent of its peers, boosted by holdings such as Exxon, which has fallen only 1.5 percent during a rough three-month stretch for many U.S. energy-related stocks, according to Morningstar Inc. He declined to comment on his fund's upcoming plans.
A benchmark heavyweight, Exxon's biggest mutual fund investors are index funds, such as the $100 billion-plus Vanguard Total Stock Market Index Fund. With oil prices down, Exxon is seen as a defensive play because its refining plants and chemicals manufacturing can benefit from lower input costs and offset profit declines related to crude oil production.
In the past three months, other big, diversified oil stocks have fared better than smaller energy companies. Shares of Chevron Corp are down 5 percent and the American depositary receipts of BP plc are off 11 percent.
It's a downturn, to be sure.
But in contrast, drilling company Nabors Industries Ltd is down 33 percent during the past three months, the worst performer on the S&P 500 Index, followed by a 29 percent decline in shares of oil and gas company Denbury Resources Inc .
U.S. energy firm EOG Resources Inc, which has become the No. 1 oil producer in the continental U.S., is down 5 percent over the same period. Its shares have recovered about 12 percent over the past week after EOG's profit beat Wall Street expectations.
Stung by Upstarts
Thanks to fracking innovations and a leading position in the Bakken and Eagle Ford shale formations, EOG's market capitalization has surged to $50 billion in recent years.
That is a fraction of global giant Exxon's $404 billion, but the rapid growth is enough to have made EOG a posterchild of the American energy-production boom and a favorite of several of the largest actively managed stock funds.
Shale oil may have fueled much of the boom, but it's extraction is more costly, leaving the industry more vulnerable when prices fall and some funds that bet on shale are now feeling the sting.
The $141 billion Growth Fund of America and Fidelity's $110 billion Contrafund are the two largest EOG shareholders in the mutual fund industry with $2.2 billion and $1.2 billion worth of stock, respectively, as of Sept. 30, fund disclosures show. Neither held any Exxon Mobil, or any significant stakes in global diversified energy stocks.
Each fund is lagging the 11.79 percent total return on the benchmark S&P 500 Index by about 3 percentage points this year, partly because of their bets on high-growth energy stocks.
Contrafund's largest energy stock holding is Noble Energy Inc, whose shares are down 19 percent in the past three months. Noble accounted for 2 percent of Contrafund at the end of September, while the Growth Fund of America held $1.2 billion worth of Noble, fund disclosures show.
Managers of the funds were not available for comment.
Portfolio managers at BlackRock's $456 million Natural Resources Fund sang the praises of diversified oil companies in a recent commentary sent to investors. But its largest holding was EOG, accounting for nearly 7 percent of assets at the end of September. The fund is down 12.33 percent over the past three months, partly because of big weightings toward EOG and oilfield services giant Halliburton Co, which is down 20 percent in the past three months.
Fund managers at BlackRock see future demand for energy climbing because they believe longer-term global trends of population growth, industrialization and urbanization remain in place, according to their commentary letter.
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