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Top Performing Energy Mutual Funds in Q1 2016

After bleeding heavily from the beginning of 2016 through early February, the energy sector made an impressive comeback to end the first quarter on a positive note all thanks to a strong spike in oil prices. The sector’s rebound also helped energy mutual funds to end the quarter with moderate gains. According to Morningstar, the mutual fund category – Energy Equity – returned 2.2% during the first quarter after losing nearly 10.5% in its first two months.

Meanwhile, the WTI and Brent crude, which slumped 28.7% and 19.2%, respectively, since the start of 2016 to reach multi-year low levels on Feb 11, gained 4.3% and 6.4% during the first quarter. This was the best quarterly performance of crude since the second quarter of 2015 that came on the back of a strong rebound from Feb 11 through the end of the quarter, when WTI and Brent crude surged 46.3% and 31.7%, respectively.

Against this backdrop, it will be worth watching the top performers from the energy equity mutual fund category in the first quarter. But before going into the discussion about the mutual funds, let’s find out the factors that impacted the movement of oil prices during the quarter.

Behind the Early Slump

Oil prices witnessed a massive slump since the start of 2016 following concerns including China-led global growth worries and unwillingness of major oil producers to reduce production despite the persistent fall in oil prices. A flurry of disappointing economic data out of China – one of the major importers of oil – raised concerns that an already weak demand environment may deteriorate further following the weakness in the Chinese economy. Dismal economic data out of the major economic regions such as the U.S., Eurozone and Japan intensified worries regarding weak global demand.

Meanwhile, the major oil producers continued to produce at high levels without considering weak global demand and an already oversupplied market. Continued increase in crude inventories also played a major role in the oil slump during the first half of the quarter. Separately, Iran, which witnessed a lift-off in sanctions on its oil export, continued to raise its production, adding to the supply glut. These were the reasons why crude prices touched 12-year low levels in early February, which in turn dragged the major benchmarks to multi-year lows.

A Remarkable Recovery

Strong intentions of major oil producers to control the supply glut played a catalyst in to the rebound. Ministers and officials of both OPEC and non-OPEC countries said that they will be meeting on Apr 17 to discuss an oil production freeze in order to boost prices. Continued decline in oil rig counts and a lower-than-expected rise in crude inventories also gave a boost to oil prices during the latter half of the first quarter.

Meanwhile, improvements witnessed in the economic environment of the U.S. and China also eased concerns over weak global demand to some extent. Separately, a weaker U.S. dollar also played a significant role in increasing oil prices as it made crude more attractive for investors trading in currencies other than the U.S. dollar.

3 Top Energy Mutual Funds

In this section, we have highlighted three fundamentally strong energy mutual funds that gained the most during the first quarter banking on a strong rebound in oil prices and the energy sector. These funds either have a Zacks Mutual Fund Rank #1 (Strong Buy) or #2 (Buy). We expect these funds to outperform their peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but also on the likely future success of the fund.

Besides having impressive first quarter return, these funds also have strong three-month returns. The minimum initial investment is within $5000. Also, these funds also have a low expense ratio.

Vanguard Energy Investor (VGENX) seeks growth of capital over the long run. VGENX invests the lion’s share of its assets in securities of companies engaged in operations related to the energy sector. The fund primarily invests in common stocks of companies.

Currently, VGENX carries a Zacks Mutual Fund Rank #1. The product has first-quarter and three-month returns of 7.8% and 20.3%, respectively. Annual expense ratio of 0.37% is lower than the category average of 1.51%.

BlackRock Natural Resources Investor A (MDGRX) invests the majority of its assets in equity securities of companies having a significant portion of their assets in natural resources. MDGRX invests in securities of companies having operations related to sectors including energy, oil and gas.

Currently, MDGRX carries a Zacks Mutual Fund Rank #2. The product has first-quarter and three-month returns of 3.9% and 17.7%, respectively. Annual expense ratio of 1.10% is lower than the category average of 1.51%.

Fidelity Select Energy (FSENX) seeks capital growth. FSENX invests a large chunk of its assets in common stocks of companies involved in the energy sector including oil, gas, electricity and solar power. The fund invests in securities of companies throughout the globe.

Currently, FSENX carries a Zacks Mutual Fund Rank #1. The product has first-quarter and three-month returns of 3.3% and 15.8%, respectively. Annual expense ratio of 0.79% is lower than the category average of 1.51%.

About Zacks Mutual Fund Rank

By applying the Zacks Rank to mutual funds, investors can find funds that not only outpaced the market in the past but are also expected to outperform going forward. Pick the best mutual funds with the help of Zacks Rank.


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