The Daily Screen: The Best Natural Resources Funds

This year, natural resources funds have been the warm, dry place in the market's tempest.

These funds, which are the subject of today's Daily Screen, typically invest in stocks of companies that look for, refine and/or sell oil and natural gas. As you might imagine, these stocks rise and fall with the prices of commodities like oil and gas. With those prices skyrocketing this year, these funds have had a solid run in a tough environment for growth stocks, gaining 18% on average since Jan. 1, compared to the S&P 500's 8.7% loss.

It's Been a Very Good Year The past 12 months have been better to natural resources funds than the previous four
	Natural Resources Funds	S&P 500
YTD	18%	-8.7%
1-Year	25.4	6.4
5-Year	9.9	20.6
Source: Morningstar. Annualized performance figures through Oct. 19.

Of course, there's a downside to these funds' reliance on commodities prices, too -- mainly that they have virtually nowhere to hide when they tumble as they did in 1998. That year, the average natural resources fund lost more than 25%, according to Morningstar. And it's yet to be seen what the current tension in the Middle East will do to oil prices. But that's why the asset-allocation types dutifully remind us that mercurial sector funds are long-term investments for no more than 5% or so of your portfolio.

We've picked through the category to single out those funds that beat their average peer over the past one- and three-year periods. After we look at the funds, we'll peek under the hood at the stocks that pushed these funds higher. Ten funds meet our criteria, and here they are, ranked by their one-year return.

The Naturals These natural resources funds have led a stellar pack this year
Natural Resources fund	1-Year Return	3-Year Return
(FSESX)Fidelity Select Energy Services	77.5%	3.7%
(FSTEX)Invesco Energy	58.2	9.7
(FSNGX)Fidelity Select Natural Gas	57.5	17.2
(UMESX)Excelsior Energy & Natural Resources	43.5	10
(FSENX)Fidelity Select Energy	34	10.5
(SLTRX)Strong Limited Resources	33.2	5.1
(FRNRX)Franklin Natural Resources	31.7	1.2
(MAGRX)Merrill Lynch Global Resources	31.3	3.5
(VGENX)Vanguard Energy	30.5	4.3
(FAGNX)Fidelity Advisor Natural Resources	26.3	4.8
Avg. Natural Resources fund	25.4	-1.7
S&P 500	6.4	13.9
Source: Morningstar. Annualized performance figures through Oct. 19.

As you can see, there's a Fidelity fund here for just about anyone, whether you want to invest broadly in the energy sector ((FSENX)Fidelity Select Energy), in energy services ((FSESX)Fidelity Select Energy Services) or in natural gas ((FSNGX)Fidelity Select Natural Gas). One thing that might turn you off, though, is that each of these funds, as well as (FAGNX)Fidelity Advisor Natural Resources, levies a front-end load or sales charge.

If you're a strict no-load investor, you might look at (VGENX)Vanguard Energy, where Ernst von Metzsch has held the reins since the fund's 1984 inception. Over the years he has built a solid track record through a variety of market environments. To get his thoughts on the sector, check out this 10 Questions interview .

Do-it-yourselfers also might take a look at (FSTEX)Invesco Energy and (UMESX)Excelsior Energy & Natural Resources, two of the category's least volatile options, according to Morningstar risk data.

When it comes to the stocks that tend to pop up in these funds, there's not too much mystery. When most people think oil and gas, they think ExxonMobil (XOM), Chevron (CHV) and Halliburton (HAL). You'll find all of those stocks in these leading funds.

Under the Hood The stocks with the biggest weighting in the combined portfolios of the 10 above funds.
Stock	Weighting in Top Funds	Number of Top-10 Funds Owning the Stock
ExxonMobil(XOM)	3.2%	7
Nabors Industries(NBR)	2.7	8
Royal Dutch Petroleum(RD)	2.3	5
Noble Drilling(NE)	2.2	6
Weatherford International(WFT)	2.2	7
Chevron(CHV)	2.2	6
Halliburton(HAL)	2.2	7
Smith International(SII)	2	6
Anadarko Petroleum(APC)	2	7
Schlumberger(SLB)	2	5
Source: Morningstar. Holdings as of funds' most recent portfolio reports.

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