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Fund Spy
3 funds finding profit outside the energy sector
Energy has been the year's hot sector, but could be cooling. These funds have proven there's money to be made elsewhere.
By Morningstar
Even though the trend has cooled somewhat in recent weeks, energy stocks have been the dominating market force so far this year, both domestically and abroad. While most other industries have actually been hurt by the effect of rising oil and gas prices, these very cyclical securities have gone through the roof.
The numbers are staggering: While the Standard & Poor's 500 Index ($INX) as a whole was flat through Oct. 19, 2005, the market performance of the Energy Select SPDR (XLE, news, msgs) exchange-traded fund (as a proxy for the energy components of the S&P 500, which make up 9.4% of the index currently) was 32.4% over the same period. The results were similar in the rest of the developed world.
Not surprisingly, funds that have loaded up on energy have tended to fare well in 2005, while those with little energy exposure have tended to lag. For example the 1,464 distinct funds in the large-value, large-blend and large-growth categories did a bit better, with an average year-to-date return of 0.59%, than did the S&P 500 Index.
But the 147 funds that had more than 15% of their portfolio allocated to energy managed an average return of 2.89%, helping 89 of them to place in the top quartile of their respective categories. By contrast, the 148 funds that invested less than 2% in energy stocks lost an average of 1.92%.
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But bingeing on energy has not been a requirement for outperformance in 2005; a handful of funds have managed to deliver strong returns despite being underweight in the market's strongest sector. I've highlighted below three such offerings that strike me as noteworthy.
Of course, there are plenty of other very fine funds out there. But each of my selections has a manager with two desirable characteristics: the willingness to think against the grain and enough conviction in his selected process to maintain an out-of-favor bet even when it's working against him.
Hotchkis and Wiley Core Value
Many investors might be more familiar with the Hotchkis and Wiley Large Cap Value (HWLIX), which is closed to new investors. That fund's seasoned team of managers, led by Sheldon Lieberman, also steers Hotchkis and Wiley Core Value (HWCAX), a much newer venture. And it's no accident that there's significant overlap between the two portfolios.
It's thus reasonable to expect the same consistent, active-value approach characterized by low turnover and low volatility that this L.A.-based boutique is renowned for. The fickle energy sector does not usually fit their mold very well. This year, the fund has held up well thanks to strong stock selection in the consumer-staples and technology sectors, with significant contributions from tobacco giant Altria (MO, news, msgs) and IT services firm Electronic Data Services (EDS, news, msgs).
Oakmark International
Despite the recent departure of co-manager Michael Welsh, Oakmark International's (OAKIX) strict deep-value discipline under the continued stewardship of David Herro should keep rewarding shareholders in the long run. Herro runs a fairly concentrated portfolio and will go wherever the bargains are, as he is unrestricted by benchmark considerations. He also sticks with his picks even if they disappoint initially. That strategy can cause the fund's returns to lag in momentum-driven markets such as the tech-bubble of the late 1990s, or even 2003 and 2004. So far this year though, it's going strong on the back of strong showings by such diverse holdings as BMW (DE:519000, news, msgs) and Euronext (ERXTF, news, msgs).
Marsico Focus
Tom Marsico is one of the best growth investors there is, and he hasn't built his record by simply following the herd. That's evident from the Marsico Focus fund's (MFOCX) portfolio. It has virtually no exposure to energy and is also dramatically underweight in the technology sector, which is a favorite hunting ground of large-growth managers. Instead, Marsico has significant overweights in financials and health care. He combines top-down analysis with bottom-up stock-picking and ends up with a concentrated portfolio that usually sports an aggressive growth orientation. This fund can be a very useful diversifier in portfolios that are skewed toward value stocks and/or smaller companies.
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