It seems that the turmoil in the Middle East is never ending. Last year, the region saw revolutions in places like Tunisia, Libya and Egypt. The result was a spike in oil prices.
And going into 2012, it looks like the volatility will continue. No doubt, the tensions over Iran’s nuclear program are ominous. In an interview in the Atlantic magazine, President Barack Obama said he would attack the country if that was the necessary option. “I don’t bluff,” he said.
But dicey geopolitics is not the only driver of oil prices. After all, it’s getting tougher to find new reserves — which is known as the “peak oil” theory. At the same time, the demand from emerging economies continues to grow.
So how to play the oil market? One effective way is to buy a mutual fund (another is via energy-sector ETFs).
Let’s take a look:
Vanguard Energy
Even though oil stocks have been big winners over the years, they can still have steep drops. Just look at the financial crisis and the ensuing global recession.
But Karl Bandtel, who manages the Vanguard Energy (MUTF:VGENX) fund, has been able to effectively make the right moves (he has operated the fund for about 20 years). For the past decade, his fund posted an annual average return of 14.78%.
Then again, Bandtel focuses most of his portfolio on mega-cap energy companies and tries to avoid heavy trading (the fund’s turnover is 31%). This tends to dampen the swings.
BlackRock Energy & Resources Investors A
Dan Rice is another veteran of the energy business, having managed the BlackRock Energy & Resources Investors A (MUTF:SGRX) since 1990. And he has proven to be a consistently strong performer. The BlackRock fund has generated an average annual return of 17.97% over the past 10 years.
Rice definitely has a knack for getting a sense of the energy business’s overall global dynamics. Once he finds a trend, he’ll focus on those companies that are trading at attractive discounts.
Rice, however, has stumbled recently. For the past 12 months, his fund is down 14%. But again, he has shown that he knows how to get things back on track.
Fidelity Select Energy
John Dowd, who operates the Fidelity Select Energy (MUTF:FSENX) fund, scours for deep discounts. While this approach can take some time to pay off, the rewards can be great. Over the past three year, the fund’s annual average return is 29.59%.
Some of the top holdings include Chevron (NYSE:CVX), Occidental Petroleum (NYSE:OXY), Exxon Mobil (NYSE:XOM) and Schlumberger (NYSE:SLB).
Invesco Energy
Last year was tough for the Invesco Energy (MUTF:IENAX) fund, which was off by 8.28%. But things are looking much better in 2012, with a year-to-date return of 9.14%.
Portfolio manager Andrew Lees maintained substantial holdings for companies that were involved in the Gulf of Mexico oil-spill disaster in 2010. For example, some of the fund’s top positions include Halliburton (NYSE:HAL) and Anadarko Petroleum (NYSE:APC).
But as seen with the recent settlement with civil plaintiffs for BP (NYSE:BP), there may be a better-than-expected resolution to the Gulf oil-spill legal liabilities.
Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “All About Short Selling” and “All About Commodities.” Follow him on Twitter at @ttaulli. As of this writing, he did not own a position in any of the aforementioned securities.
