FSNGX was up nearly 19% year to date on June 23, but by August 8 it was down 13.2% for the year. The fund, which topped Dion’s Sector Momentum Tracker rankings table from April 18 to June 27, slid to tenth last week, after a month in which it fared worse (-7.9%) than 99% of all natural resource funds tracked by Morningstar.
Sector Momentum Tracker—one of Fidelity Independent Adviser’s three momentum-based publications—has been published weekly since June of 2004. As of August 11, Dion’s Sector Portfolio had returned 23.48% net of fees since inception, outperforming the S&P 500 by nearly 8% for the same period. “FSNGX has been in our portfolio since October of 2007,” Dion said, “and despite the recent slide, the fund is still up 2.52% for a one year period ending August 11.”
“Natural gas prices typically soften in summer, when demand for the fuel for heating is negligible,” Dion noted, “but there’s probably more than just that behind the recent price plunge.” Natural gas sold on the New York Mercantile Exchange for more than $13 per million BTUs (British thermal units) in early July but fell for five straight weeks (as of August 6), dipping as low as $8.50 by August 8.
In his profile of FSNGX, Dion cited weather, production and storage levels among the causes of the natural gas slide. “Obviously, this is a volatile fund, full of fits and starts,” Dion said. “Halfway through 2008, Fidelity Select Natural Gas was poised to deliver 40% or greater returns for the year, as it did in 2007, 2005 and 2004,” Dion added, “but the downturn in natural gas prices during the last few weeks made that questionable.”
While Dion believes that natural gas prices are the primary culprit in FSNGX’ downturn, he also places some of the onus on the fund’s manager—James McElligott: “McElligott’s overweighted of E&P stocks and underweighted stocks of firms exposed to natural gas and oil refining, marketing, and transportation.” Dion believes that while this weighting served the fund well when prices were soaring and profit margins for refiners were shrinking, but that “at the moment, that’s not happening.”
Can FSNGX regain momentum in Dion’s rankings? Dion is not entirely unconvinced: “With energy prices and demand for ‘greener’ power high, more and more North American electric utilities will shift from coal-fired generation to natural-gas generation, driving up demand.” Dion also believes that “more industrial and electric generation consumers could rely on natural gas if prices stay low, lifting demand.
Despite these promising factors, Dion,—who is also the president of a money management firm sees FSNGX as potentially risky for investors: “FSNGX is an extremely volatile fund—measured by its three-year standard deviation of 27.50, which is second only to Fidelity Select Gold in volatility.” While he is quick to note that “FSNGX is capable of outsized gains,” Dion also cautions that “the fund is also capable of deep slides and should be treated as such—as a niche holding.”
Top 10 Holdings*
Chesapeake Energy : 6.81%
Plains Exploration & Production : 6.54%
Ultra Petroleum : 6.20%
Range Resources : 5.34%
Denbury Resources : 4.50%
Southwestern Energy : 4.45%
Quicksilver Resources : 4.06%
Valero Energy : 3.80%
EOG Resources : 3.16%
Canadian Natural Resources : 3.10%
Sector Momentum Tracker is a member of Fidelity Independent Adviser’s family of publications. With more than 70,000 subscribers in the United States and 29 other countries, Fidelity Independent Adviser publishes four monthly newsletters and three weekly newsletters. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers.
Don Dion is the publisher of the Fidelity Independent Adviser family of newsletters, which provides to a broad range of investors Don’s commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. Dion is also president and founder of Dion Money Management, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Massachusetts, Dion Money Management manages more than $715 million in assets for clients in 49 states and 11 countries.