The past two years have demonstrated that oil prices have a dramatic impact on the performance and cash flows of natural resources funds.
Just consider how oil price activity played out the last two summers. This year, as in 2014, prices for the U.S. and global oil benchmarks (West Texas Intermediate crude and Brent crude) peaked near the end of June and then headed into steep decline.
Last year, this resulted in seven consecutive months of negative performance for both WTI and Brent, as crude prices dropped 54.9% and 57.2%, respectively.
The past few months, the descent for both benchmarks was also volatile. Both WTI and Brent traded at six-year lows and were down at least 30% from their highs at the end of June.
Slumping oil prices have had a clear impact on the performance, fund-flow activity and buy/sell decisions for funds in Lipper's Global Natural Resources Funds and Natural Resources Funds classifications.
Mutual funds in the GNR and NR categories invest primarily in the securities of companies engaged in the exploration, development, production or distribution of natural resources (including oil, natural gas and base minerals) or alternative energy sources (including solar, wind, hydro, tidal and geothermal).
Funds that invest a majority of their assets in oil companies account for most of the funds in the Global Natural Resources Funds and Natural Resources Funds classifications.
PERFORMANCE BREAKDOWN
Returns on funds in these categories showed a positive correlation to the movement in oil prices in the summers of 2014 and 2015.
The average performance for GNR funds and NR funds closely followed the direction of WTI and Brent prices during a vast majority of the period.
The only times all four groups did not move in the same direction were August 2014 and May 2015. In August 2014, both NR (+3.2%) and GNR (+1.8%) experienced slight upward bumps when WTI (-0.4%) and Brent (-3.6%) trended downward, while in May 2015 WTI prices appreciated slightly (+1.1%) as the other groups fell off a bit.
During the slide for WTI and Brent prices in late June through August 2015, funds in the GNR (-24.2%) and NR (-24.5%) categories also experienced a similar sharp downward trend.
There was also consistency within the universe: Every fund in the two categories suffered a double-digit loss during this time frame.
Lipper's data indicates that a positive correlation also existed between the direction of oil prices and fund flows for the GNR and NR categories.
During June through August, when WTI (-36%) and Brent (-30%) were both down significantly, there were net outflows from both of the fund classifications. More than $480 million left the coffers of GNR funds, while NR funds had net negative flows of about $330 million.
Within GNR, three funds accounted for most of the money leaving the group. Leading the way was T. Rowe Price New Era Fund (PRNEX) with outflows in excess of $165 million, followed closely by Prudential Jennison Natural Resources Fund (PRGNX) and Vanguard Energy Fund (VGENX), down $146 million and $126 million, respectively.
Within the NR group, one fund family accounted for the bulk of the net outflows: Fidelity Management & Research. Fidelity, which has six NR funds, had roughly $240 million leave during this time, with Fidelity Select Energy Service Portfolio (FSESX) and Fidelity Select Natural Gas Portfolio (FSNGX) (with net outflows of $71 million and $63 million, respectively) taking the two biggest hits.
INFLOWS IN THE SPRING
When oil prices rose from the late first quarter to the late second quarter this year, the GNR and NR classifications both responded with overall net inflows.
The NR group took in more than $840 million, once again paced by Fidelity.
This fund family accounted for $340 million in net new money, with Fidelity Select Energy Portfolio (FSENX) taking in the largest chunk (+$183 million). Also contributing significantly to NR's positive showing was Invesco Energy Fund (FSTEX), which registered $118 million in net inflows.
The net flows into GNR (+$423 million) were roughly half of the NR net intake. The largest positive net flows were recorded by VGENX and RS Global Natural Resources Fund (RSNRX) at $353 million and $167 million.
Going against this trend was PRNEX which posted net outflows (-$153 million) while oil prices were appreciating, along with its $165 million of negative flows during the recent oil price decline.
OIL COMPANY STOCKS
As for holdings in oil company stocks by GNR and NR funds during the oil price slump in the summer of 2015, selling was fairly concentrated within NR but spread out within GNR.
In the NR classification, four companies had their net overall shares reduced by more than one million shares, while the comparable number for the GNR category was 16.
The four companies within NR that experienced the most selling were Vantage Drilling (-27.6 million shares), BG Group (-3.1 million shares), Halliburton (-2.7 million shares) and Weatherford International (-2.1 million shares).
The number of shares of Vantage Drilling sold represented 8.8% of the company's shares outstanding. Four funds completely sold out of Vantage, led by FSENX, which closed out an 18.1-million-share position.
Weatherford's activity was a result of four funds liquidating their positions, while BG Group had three funds close out their entire positions.
Within GNR, nine companies went from having a total aggregate position of over one million shares to being completely liquidated. The companies that had the largest positions closed out were Pacific Exploration and Production (-3.9 million shares) and Brightoil Petroleum Holdings (-2.2 million shares).
The most widely held stocks within NR were essentially static during this period. Schlumberger (11 funds) and Baker Hughes (10 funds) were the most widely held within NR, and their totals did not change.
The GNR classification showed a little more movement in its most widely held stocks.
GNR started with five stocks being held by a double-digit number of funds: EOG Resources (held by 15 funds), Cabot Oil & Gas (12 funds), Anadarko Petroleum (11 funds), Concho Resources (11 funds) and Antero Resources (10 funds). Within this group EOG Resources was unchanged, while Cabot Oil & Gas, Anadarko Petroleum and Concho Resources all added one fund to their totals.
Antero Resources had three funds liquidate their positions: Putnam Global Natural Resources Fund (EBERX), AllianzGI Global Natural Resources Fund (RGLIX) and Putnam Global Energy Fund (PGEAX) liquidated positions of 4.9 million shares, 550,400 shares and 353,200 shares, respectively.
If this summer's downturn in oil prices stretches out for seven months, as last year's did, advisors and clients can expect to see additional significant net outflows from funds in Lipper's natural resources classifications as well as negative returns for the groups.
Patrick Keon is a research analyst specializing in U.S. fund classifications and portfolio analytics at Lipper.
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