We have several energy-related stocks on the Wealth Builder Recommended List. They include major producers like Suncor and Cenovus, mid-stream companies such as Gibson Energy, drilling firms like Trinidad Drilling, and pipeline companies including Enbridge and TransCanada Corp.
I know that some readers prefer to invest in stocks and don’t want to hear about funds. But the reality is that funds (whether mutual funds or ETFs) are a very effective way to get broad exposure to a sector if you only have a limited amount of money to invest.
With that in mind, I did some research on the top-performing energy funds in Canada. Here are the ones that stood out from the crowd.
Franklin Bissett Energy Corporate Class. Before it was taken over by Franklin Templeton, the Bissett organization was headquartered in Calgary and its top managers still operate from there. That means managers Garey Aitken and Les Stelmach are well plugged in to the latest developments in the energy patch and the performance of this fund shows they put that knowledge to good use.
This fund has been a first-quartile performer in its category every year since 2008. It has an outstanding five-year average annual compound rate of return of 32.4 per cent, more than double the category average. Over the 12 months to April 30 it gained 61.2 per cent and so far in 2014 it is up by 18.7 per cent (to May 9).
The fund invests only in Canada and a large percentage of the assets are in small- to mid-cap stocks. That makes it more risky but also adds to the growth potential. These aren’t cheap stocks – the fund has an average p/e ratio of 35.6. But the managers have proven over the years that they can pick winners.
This is a small fund with only $67 million in assets under management. And cost-conscious investors won’t like its relatively high MER of 2.55 per cent. But based on the results, unitholders are getting excellent value for their money.
If you have a fee-based brokerage account, the F series will generate slightly better returns because of its lower MER of 1.48 per cent. Otherwise, I recommend the Series A front-end load units, purchased if possible with zero commission. The code is TML3021.
BMO Global Energy Class. BMO doesn’t have a lot of outstanding funds but this one certainly fits the bill. However, the name is rather misleading. Based on its current composition, this isn’t a truly diversified global fund at all. Yes, 14 per cent of the assets are overseas, mostly in Argentina, but there is nothing at all in the U.S.
Like the Franklin Bissett fund, this one invests mainly in Canada and several of the same company names show up in the top 10 positions of both. The main difference is that this fund places bigger bets on stocks that managers Kyle Hunter and Mark Serdan like. There is one position in the portfolio –Fission Uranium – that has a weighting of 6.8 per cent and several that are over 4 per cent.
You can’t argue with the results, though. The five-year average annual compound rate of return to April 30 was 23.2 per cent, more than triple tne Natural Resources category average (for some reason, this fund is in a different classification than the Franklin Bissett fund, which is categorized as Energy Equity). The latest 12-month gain was 61.1 per cent and the year-to-date advance was 25 per cent.
This fund is even smaller than the Franklin Bissett entry with only $52 million in assets under management. The MER is slightly higher at 2.61 per cent (A units). The code for the A units is BMO236.
iShares S&P/TS Capped Energy Index ETF. No exchange-traded fund in energy sector comes close to the performance numbers of the top mutual funds in the category. But for those who wouldn’t dream of investing in one of those high-cost mutual funds, this is the best choice. You’ll find many more big names in this portfolio – Suncor Energy, Canadian Natural Resources, Cenovus Energy, Encana, Imperial Oil, etc. So there’s somewhat less risk here than in the two mutual funds we’ve looked at.
However, the returns are nowhere near as good, despite the much lower MER of 0.6 per cent. The five-year average annual compound rate of return of 8.6 per cent is well below the average for the Energy Equity category as was the 12-month gain to April 30 of 33.2 per cent. So far in 2014, the fund has earned 13.9 per cent. The trading symbol is XEG.
Another energy ETF that’s worth a look is the relatively new First Asset Canadian Energy Covered Call ETF, which was launched in June 2011. It invests only in Canadian stocks but, unlike the others, uses a covered call options strategy to enhance income. It hasn’t been around long enough to establish a meaningful track record. It trades under the symbol OAF.
If you are a fund investor and you want exposure to the energy sector, my pick is the Franklin Bissett fund. However, because of its small- to mid-cap bias, you may want to also buy some shares in the iShares ETF, which focuses on large-caps. Ask your financial adviser for guidance.