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Crude Misery Spills to Burn 2015: 3 Worst Energy Funds

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On the second last trading session of 2015, markets were pulled back again after a slide in crude prices. This was indicative of the mood that prevailed through most part of 2015; as crude price declines affected markets on most days. The downtrend had begun in mid 2014, and the slump for energy prices continued in 2015 as well. On the second last trading session of the year, the WTI Crude Oil slumped 3.5% to settle at $36.60 and the Brent Crude Oil nosedived 3.7% to close at $36.46. WTI Crude Oil was at $52.72 on Jan 2, 2015, while Brent Crude Oil was at $55.38.

This slump has obviously dragged the energy sector lower as well. In fact, Energy Select Sector SPDR ETF (XLE) is 2015’s biggest decliner among the S&P industry groups. It has nosedived 24.4% so far in 2015. The rout has not spared the energy mutual funds, and Equity Energy and Energy Limited Partnership were among the biggest mutual fund category losers in 2015, according to Morningstar data. Energy Limited Partnership and Equity Energy have plunged 36.2% and 27.7% in 2015. Moreover, not a single Equity Energy mutual fund ended in the green in 2015.

Weak operations followed by poor financials eventually compelled the players to reduce headcount, making 2015 a year of agony for everyone related to the space. As we come to the end of the year we are not sure of the agony is about to end.

It is uncertain if the energy prices will move up in the first part of 2016. Major energy firms with significantly lower year-over-year operating income are now saddling a huge debt load. Recently, Moody’s Investors Service slashed its 2016 crude forecast.

However, rather than plunging into the outlook of 2016, let’s identify today the 3 biggest energy mutual fund losers.

Crude Slump: A Brief History

During 1990 and early 2000, the U.S. was more dependent on crude import as domestic demand was far above its conventional oil supply. But with the invention of new techniques like hydraulic fracturing and horizontal drilling, U.S. shale producers ramped up oil production relentlessly. Eventually, owing to the huge scale of crude output, the U.S. started relying less on oil import.

The shale boom turned the U.S. into an oil-surplus economy from a crude-deficit region. Along with the U.S., the Organization of the Petroleum Exporting Countries (OPEC) – the international cartel of oil producers – also pumped up more crude. All these events led to a global oversupply of the commodity and pushed oil to its multi-year lows.

Now the question that arises is what stopped the big oil producers from reducing output in 2015, when the measure could have taken crude back to its glorious days as were seen in the first half of 2014.

Looking back, a war for market share has been raging among big oil producers like OPEC, the U.S. and Russia. Each of these markets has been pumping hard and competing for market share, completely ignoring the downtrend in oil price.

On top of that, at the meeting in Vienna, OPEC decided not to cut oil production. Instead, the cartel raised its production ceiling. Saudi Arabia-led OPEC explained that if it is the only block to curb output when other players continue to produce at their own lofty levels, it will end up losing market share.

In the absence of production cuts from OPEC, the resilience of North American shale suppliers to keep pumping despite crashing prices, and a weak European economy, not much upside is expected in oil prices in the near term.

A Lot to Refine

As crude prices hover around 7-year lows, the top energy companies have cut spending (particularly on the costly drilling projects) on the back of lower profit margins. This, in turn, has meant less work for the beleaguered drillers as offshore exploration for new oil and gas projects has almost come to a standstill.

Moreover, the dollar surge is another headwind for the energy sector. Borrowings are set to be costlier and particularly so for high-yield firms. Thus, it will curtail the money flow into capital-intensive shale oil and gas drilling projects. This in turn will lead to higher bankruptcies, hitting the already-battered energy sector. Federal Reserve’s decision to hike benchmark interest rates in nearly a decade boosted dollar again, and gradual rate increases now may keep the dollar higher. (Read: Catching Up on 3 Sectors Post Fed Rate Hike)

The Iranian nuclear framework agreement, which has the potential to release more of the commodity in the already oversupplied market, has put the final nail in the coffin.

As it is, with inventories near the highest level during this time of year in 80 years at least, crude is very well stocked. On top of that, OPEC members (like Saudi Arabia) have made it clear time and again that they are more intent on preserving market share rather than attempting to arrest the price decline through production cuts. Therefore, the commodity is likely to maintain its low trajectory.

Biggest Losers in 2015

Below we present the 10 biggest energy mutual fund losers of 2015:

Mutual Fund

Ticker

YTD Return (%)

ProFunds Oil Equipment Svc & Dist Inv

OEPIX

-47.33

BlackRock Energy & Resources Inv A

SSGRX

-39.45

Fidelity Select Natural Gas Portfolio

FSNGX

-38.37

Putnam Global Energy A

PGEAX

-35.54

Baron Energy and Resources Retail

BENFX

-32.95

Rydex Energy Services A

RYESX

-32.31

Rydex Energy A

RYENX

-31.1

Invesco Energy A

IENAX

-30.2

BlackRock All-Cap Engy & Res Investor A

BACAX

-29.92

Guinness Atkinson Global Energy

GAGEX

-27.21

Source: Morningstar

None of the energy mutual funds in this list of 10 worst performers carry a favourable Zacks Mutual Fund Rank. The best rank that they managed was a Zacks Mutual Fund Rank #3 (Hold). Baron Energy and Resources Retail (BENFX - Free Report) , Rydex Energy Services A (RYESX - Free Report) and Invesco Energy A ( (IENAX - Free Report) were the only three funds that carry a Hold rating.

In addition to this list we’ve also selected three worst performing energy mutual fund performers based on Zacks Mutual Fund Rank, negative year-to-date and 1-year returns, and carry sales load. They also have negative 3- and 5-year annualized returns. The minimum initial investment is within $5000. The following funds not only slumped in 2015 but may move further south in the near term, making them funds to sell now.

BlackRock Energy & Resources Investor A (SSGRX - Free Report) seeks capital appreciation over the long run. SSGRX invests a lion’s share of its assets in small cap companies related to sectors including energy, natural resources and utilities. SSGRX has no limit on number of companies it can invest in, but it will invest in a minimum of three countries.

SSGRX currently carries a Zacks Mutual Fund Rank #5 (Strong Sell). The year-to-date and 1-year losses are 39.5% and 38.7%. The 3 and 5-year annualized losses now stand at 18.8% and 16.5%. Annual expense ratio of 1.31% is lower than the category average of 1.45%, but SSGRX carries a front end sales load of 5.25%.

Putnam Global Energy A seeks long term capital growth. PGEAX invests primarily in global large and mid-size companies involved in exploration, production and refinement of conventional and alternative sources of energy.

SSGRX currently carries a Zacks Mutual Fund Rank #4 (Sell). The year-to-date and 1-year losses are 35% and 35.2%. The 3 and 5-year annualized losses now stand at 14.5% and 9.6%. Annual expense ratio of 1.27% is lower than the category average of 1.51%, but PGEAX carries a front end sales load of 5.75%.

BlackRock All-Cap Energy & Resources Investor A (BACAX - Free Report) seeks capital appreciation over the long term. BACAX invests a majority of its assets in domestic and foreign natural resources and energy companies. BACAX may also invest in related businesses and utilities. However, a minimum of 25% of its assets must be invested in the energy sector.

BACAX currently carries a Zacks Mutual Fund Rank #4. The year-to-date and 1-year losses are 31.3% and 30%. The 3 and 5-year annualized losses now stand at 8.6% and 9.8%. Annual expense ratio of 1.38% is lower than the category average of 1.45%, but BACAX carries a front end sales load of 5.25%.

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 Zacks Rank.



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