The Daily Screen: The Best Natural Resources Funds

Natural resources and energy funds have been sitting pretty in this year's ugly market.

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These funds, the focus of today's Daily Screen, usually invest in the stocks of companies that look for, refine and/or sell oil and natural gas. These stocks and the funds that own them tend to rise and fall with commodity prices. This year, rising demand has sent the price of oil and gas way up, boosting natural resources funds in a tough year for growth stocks in general.

Indeed, despite a sleepy reputation, the average natural resources fund is up more than 17% since Jan.1, while the S&P 500 index, a benchmark of the broader market, is underwater.

A Natural, This Year
	Average Natural Resources Fund	S&P 500
YTD Return	17.3%	-5.7%
1-Year Return	15	-2.3
5-Year Return*	9.5	20
10-Year Return*	9.1	18.4
Source: Morningstar. *Annualized Performance through Nov. 20.

Before you break out your checkbook, keep in mind that these funds are hardly risk-free. When commodity prices tumble, these funds have virtually nowhere to hide. When that happened in 1998, for instance, the average natural resources fund fell more than 25%, according to Morningstar.

But if you like the idea of committing 5% or so of your portfolio to a long-term defensive investment, we've done some scouting for you. We've sifted the category to turn up funds that beat their average peer over the past one- and three-year periods. The list has turned up funds with a somewhat all-weather approach because the past three years include that nasty 1998. Here's a top 10 list, ranked by one-year returns.

Leading Natural Resources Funds
Fund	1-Year Return	3-Year Return*
(ICENX)Icon Energy	54.5%	12.5%
(FSNGX)Fidelity Select Natural Gas	43.8	17.7
(FSTEX)INVESCO Energy Inv	36.3	9.6
(FSESX)Fidelity Select Energy Services	34	1.8
(UMESX)Excelsior Energy & Natural Resources	28.4	9.8
(FNARX)Fidelity Select Natural Resources	19.7	10.3
(FNRAX)Franklin Natural Resources	18.5	4.1
(MAGRX)Merrill Lynch Natural Resources	18.4	6.5
(VGENX)Vanguard Energy	17.8	4.7
(FSENX)Fidelity Select Energy	17.6	11.1
Avg. Natural Resources fund	15	-2.3
S&P 500	1.3	15.4
Source: Morningstar. *Annualized. Performance through Nov. 20.

If you're a stock investor, we've also screened these funds' holdings to see what stocks propelled their returns, but first let's look at the funds.

As you can see, Fidelity has funds covering the sector broadly like (FSENX)Fidelity Select Energy and (FNARX)Fidelity Select Natural Resources. The Boston fund titan also has funds that shave the sector into thinner slices like (FSNGX)Fidelity Select Natural Gas and (FSESX)Fidelity Select Energy Services. The firm's select funds are known for rapid manager turnover, but also for solid returns from stocks picked by Fidelity's vast and vaunted bench of analysts.

One downer to Fido's select pack, however, is that each levies a 3% front-end sales charge on new shares.

If you work with a broker, check out the broker-sold (MAGRX)Merrill Lynch Natural Resources fund or the (FNRAX)Franklin Natural Resources fund. The Merrill fund weathered 1998's storm best, losing a relatively tame 15.1%, compared with the Franklin fund's 25% loss, which matched the category's average.

Do-it-yourselfers should check out no-load funds, including leader of the pack (ICENX)Icon Energy, (UMESX)Excelsior Energy and Natural Resources or (VGENX)Vanguard Energy. The icon fund is the most aggressive -- it lost more than 37% in 1998 -- while the other two are tamer.

To get some details on investing in the sector, check out this September 10 Questions interview with Vanguard Energy fund manager Ernst von Metzsch, who has held the fund's reins since its inception 16 years ago.

If you're curious about which stocks boosted these leading funds, there's not much mystery. The cumulative top 10 holdings among the 10 leading funds on our list is a Big Oil all-star team: ExxonMobil(XOM), Chevron (CHV) and Halliburton(HAL).

Under the Hood Stocks with the biggest weighting in the combined portfolios of the 10 funds listed above
Stock	Weighting	Top-10 Funds Owning the Stock
ExxonMobil(XOM:NYSE)	3.1%	7
Nabors Industries(NBR:NYSE)	2.4	8
Noble Drilling(NE:NYSE)	2.3	7
Weatherford Intl.(WFT:NYSE)	2.3	8
Schlumberger(SLB:NYSE)	2.3	6
Chevron(CHV:NYSE)	2.1	6
Halliburton(HAL:NYSE)	2	7
Baker Hughes(BHI:NYSE)	1.9	7
Tidewater(TDW:NYSE)	1.8	7
USX-Marathon Group(MRO:NYSE)	1.8	6
Source: Morningstar. Holdings as of funds' most recent portfolio reports.

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