By Suzanne McGee
Revolutions in Tunisia and Egypt, unrest in Bahrain and Yemen and war in Libya drove crude-oil prices above $100 a barrel during the first quarter of the year—and helped several mutual funds with outsize exposure to the energy business post eye-popping gains.
That includes Integrity Williston Basin/Mid-North America Stock /zigman2/quotes/207432964/realtime ICPAX +0.96% , which returned 20.74% year-to-date, bringing its 12-month return to 72.58% and making the fund the top performer in this newspaper's quarterly Winners' Circle contest of top-performing diversified U.S.-stock funds.
"The world has pretty much run out of cheap and easy oil," Robert Walstad , co-manager of the Integrity fund, said three months ago when his fund placed second in the rankings. He said a lot of the remaining reserves still to be found and extracted within North America are located in the region where his fund looks for some of its best ideas: the part of Middle America that stretches from Texas up to the Dakotas. Mr. Walstad was traveling and unavailable for comment last week.
The Integrity fund, with about $255 million in assets, maintains close to half of its holdings in exploration-and-production companies, as well as oil-and-gas well-service businesses, including stocks such as Brigham Exploration Co., which Mr. Walstad said has had a "terrifically successful streak in its drilling program." That success has been reflected in Brigham's stock price, which rocketed to $37.18 as of March 31 from $15.95 a year earlier.
Looking for Bargains
Higher energy prices triggered by last April's BP disaster in the Gulf of Mexico, improving global demand and the recent tensions in the Middle East have boosted the share prices of countless energy companies over the past 12 months. That helped performance at many mutual funds that added these stocks to their portfolios, whether out of conviction that they were undervalued or an expectation that the market might be vulnerable to any kind of demand or supply shock.
Many of these funds ended up on our Winners' Circle list of funds, which is based on preliminary data from Morningstar Inc. Only funds with at least $50 million in assets and a three-year track record are included in the rankings. Index funds, leveraged index funds, and inverse leveraged funds are excluded.
Taking second place: Cambiar Aggressive Value /zigman2/quotes/200981064/realtime CAMAX -0.16% , which has returned 19.09% year-to-date and 56.59% over the last 12 months.
"Our view has been, and remains, that we're going to see very high oil prices, thanks to rather inexorable demand trends from the emerging markets. And while we aren't in the camp that believes we'll run out of oil tomorrow, the remaining targets for exploration are smaller, more geographically complicated and expensive and—as the BP explosion last spring showed—have a lot of risks," says Brian Barish , manager of the $300 million Cambiar fund.
The fund's strong showing was due in large part to Mr. Barish's decision to invest in energy companies that, he says, had been trading at low valuations relative to the actual worth of the reserves on their books. "We owned BP until last April, when our analyst realized that the Gulf situation was going to be much worse than was being reported in the press," he says. After selling it, he says, the firm found itself with cash to invest in other stocks in the sector that had been crushed. Investors benefited from the addition of stocks such as Apache Corp. and Devon Energy /zigman2/quotes/209479244/composite DVN +4.79% Corp.
For the most part, the top-performing funds entered this quarter's Winners' Circle not by trying to chase macro developments such as global economic trends or geopolitical instability, but rather by seeking out stocks that managers believed were trading at a discount to their value and poised to deliver strong growth.
While some of that growth has come from energy and other commodity-related investments, technology companies also have been a solid source of returns for funds like third-ranked AllianceBernstein Small/Mid Cap Growth /zigman2/quotes/203862742/realtime CHCLX +2.34% , up 47.65% in the last 12 months and 14.21% so far this year. Bruce Aronow , the fund's lead manager, has maintained large positions in companies that he expects to benefit from an uptick in corporate spending on technology, such as Aruba Networks Inc. and Tibco Software Inc.
"Employees across an enterprise have an expectation that regardless of where they are or what kind of device they are using, that they will be able to access all the information and data they need to do their jobs at any time of day or night, and that requires a very robust infrastructure," says Mr. Aronow. Companies like Aruba, he says, provide company-wide local area networks that accommodate those demands.
Even beleaguered consumers proved to be a source of profits for Mr. Aronow's fund, which has about $732 million in assets. True, consumers may be staggering under heavy debt loads and wary about the job market, but Mr. Aronow noticed that didn't affect their willingness to pay monthly fees to Netflix /zigman2/quotes/202353025/composite NFLX -2.60% Inc. in exchange for the ability to rent DVDs by mail and watch an ever-growing array of films and other programs on their computers, thanks to streaming technologies. Netflix's stock has soared to $237.78 from $175.70 at the end of 2010 and $73.74 a year ago as it continues to retain existing subscribers and attract new ones.
Mr. Aronow dragged his own family to eat at their local Chipotle Mexican Grill /zigman2/quotes/200781108/composite CMG +2.77% restaurant before buying the stock. Not only did he end up investing in the company, but his younger son, assigned by his third-grade teacher to write a persuasive essay, chose as a topic why his fellow students might want to eat out at Chipotle.
Doing the Research
Some of the small-cap funds among this quarter's winners, like the Delaware Smid Cap Growth /zigman2/quotes/200336916/realtime DFCIX +3.23% fund co-managed by Chris Bonavico , sold some of the big winners, including Netflix, because they had simply grown too large. Still, the No. 4 fund, which has about $798 million in assets, captured enough of Netflix's big gains to post a 47.39% return for the past 12 months and a gain of 14.33% for the first quarter. "When you only own 28 stocks, as we do, you can afford to do a deeper dive when it comes to research than less-concentrated funds can manage," says Mr. Bonavico. Extensive due diligence, including long conversations with movie-studio executives, made him comfortable that Netflix's prospects wouldn't be derailed by consumers opting to download movies, and that Netflix would benefit from streaming.
"We're looking for more of those businesses—companies that are highly differentiated—before the rest of the crowd has really picked them over," Mr. Bonavico says. Current holdings that he is counting on to continue to make the fund a winner include Verifone Holdings /zigman2/quotes/226857682/composite PAY +5.86% Inc.—the largest provider of payment terminals in the country, which he believes will benefit from the trend toward more mobile payments, such as using credit and debit cards to pay taxi fares—and Weight Watchers International /zigman2/quotes/202694274/composite WTW +2.30% Inc., whose new management team has overhauled its online presence.
"As long as you are focusing on the fundamentals of each stock in the portfolio and do your research thoroughly, there's no reason not to stay a winner," Mr. Bonavico says.
Ms. McGee is a writer in New York. She can be reached at email@example.com.