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Five Funds That Tap Energy's Potential

It's high time to give your portfolio an energy boost.

A large contingent of the smart-money set is concluding that the energy sector, after years of neglect, deserves an overweighting in 2004 -- for several reasons. First, energy demand continues to rise while supply remains tight. Second, energy companies' earnings growth has been among the most impressive of all sectors and looks poised to continue in 2004. Third, the energy sector has tightened and (pardon the expression) refined its operations in the painful past two decades after the energy bubble burst, taking the sector from a 40% weighting in the S&P 500 to about 8% today. Last, energy stocks on average are dirt cheap compared with other sectors -- in part because the stocks don't reflect the higher oil prices that the market continues to discount.

"One of the big surprises for 2004 is that oil and natural gas prices are going to average much higher than anyone expects," said Leigh Goehring, co-manager of the Jennison Natural Resources fund.

After lagging frothy tech stocks and the broader market for most of 2003, Wall Street has recently cottoned to energy stocks -- the sector's 13.8% return for December was tops among S&P 500 sectors -- and energy's bull run appears far from extinguished. Individual investors looking to tap the sector's strength have plenty of solid options, including a handful of top-shelf energy and natural resources funds as well as some low-cost exchange-traded funds. Today's column offers five offerings worthy of consideration.

But first, let's briefly examine why the sector looks poised to boom in 2004 and beyond.

Oil Prices: Oil prices have remained above $30 a barrel since before the war in Iraq, and energy watchers are growing increasingly convinced that prices won't slide to the $18 to $25 range anytime soon. The Department of Energy's Energy Information Administration projects average oil prices of $28 to $30 a barrel for 2004. Boston-based energy research firm Cambridge Energy Research Associates expects oil prices in the high-$20s for the year. However, "major oil stocks have not been reflecting $25 oil," said Charles Ober, manager of the T. Rowe Price New Era fund, in his recent outlook.

Jennison's Goehring expects oil prices in 2004 will average over $30 a barrel because OPEC should have the ability to retain pricing power, thanks to a slowdown in the growth of oil supply from non-OPEC nations. The skipper, whose fund has averaged a 22% annual return over the past five years, said 2004 may be the year the gap between the perception and the reality about oil prices closes. If the perception is $18 to $25 a barrel and Goehring is right that the reality will remain around $30 a barrel or higher, "anything energy-related is going to be a superb performer in 2004."

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