Thursday, December 08, 2005

Wanted: Cheap, disagreeable investors for LTIR.

NY Times: Today's Energy Stocks May Well Be Tomorrow's.


"Over the near term, I think it's going to be kind of a struggle because we have a lot of uncertainty in the marketplace in terms of G.D.P., consumer demand, geopolitical considerations, rising interest rates," James D. Wineland, manager of the $4 billion Waddell & Reed Advisors Core Investment fund, said of the sector's share-price performance.

But he pointed to the continuing imbalance of supply and demand and added, "If we look beyond that, I think there's a huge future for energy stocks because this is an issue that isn't going away." He has made a big bet on that future, placing about 20 percent of the fund's assets in energy, double the market weighting.

David Spika, investment strategist at Westwood Holdings in Dallas, an institutional portfolio manager with large energy holdings, has similar hopes for the sector.

"Even though we have seen a significant decline in crude, the structural supply-demand imbalance remains," he said. "Obviously you have to expect corrections from time to time."

A chronic imbalance would set energy apart from other commodities, whose prices tend to fall over time when adjusted for inflation, said Jeremy Grantham, chief strategist at the portfolio manager Grantham, Mayo & Van Otterloo. While ephemeral factors can cause cyclical gluts and scarcities of commodities, new production methods help to ensure that supply outstrips demand over the long haul - except in the case of energy, Mr. Grantham has come to believe.

"We're gung-ho about regression to the mean, so when prices rise a lot, we are expecting to go short and underweight," he said about most commodities and the stocks of their producers. Since the shortages of the 1970's, the average price of a barrel of oil has been $36 in today's dollars. Mr. Grantham said he expects the average price to keep climbing as what is left of the earth's supply of oil becomes harder to extract.

"I'm offering oil as an exception to the principle" of mean reversion, he said. "Having hunted high and low and never found a major asset class that went through a paradigm shift, I think oil is it."

If a paradigm shift is occurring, the investment masses are barely noticing. Tim Guinness, who manages the Guinness Atkinson Global Energy fund, among the best-performing equity funds this year, with a return of 61.4 percent through Thursday, points out that energy stocks as a group have doubled since crude oil reached a trough in 1998 at less than $10 a barrel.

At the bottom, he recalled, energy accounted for a mere 6 percent of the valuation of Standard & Poor's 500-stock index, compared with 27 percent at the peak of the oil boom in the early 1980's. Today, with crude around $60, energy accounts for less than 10 percent of the index. Who's a Contrarian? Not Me!


The pilot of Fidelity's huge Contrafund excels by focusing on companies with visionary executives.

With little fanfare, Fidelity Contrafund overtook its sister fund, Magellan, sometime this past September to become the largest stock fund in Fidelity's vast stable. It should have come as no surprise. In contrast to Magellan, Contra has prospered, despite assets that now exceed $56 billion. The record is compelling: Contra easily topped Standard & Poor's 500-stock index over the past 15 years. What's more, it outpaced the index in nine of the past 15 calendar years, including 2005 to October 1. An investment of $10,000 in Contra 15 years ago would be worth $97,400 today, versus $54,000 for Vanguard 500 Index.

We dwell on the 15-year benchmark because the man behind the sterling record, Will Danoff, celebrated his 15th anniversary at the fund's helm in September. A salty product of Harvard and the Wharton School, Danoff claims he's no contrarian -- that Contrafund is just a name. So what accounts for his stock-picking success? And how will he keep Contra moving forward under the weight of all those billions of dollars? For the answers, listen in on our conversation, conducted one fine autumn afternoon above the streets of Boston's financial district.

Q: Where are we in the energy-stock cycle?

A: It's still early. Maybe we're in the fifth inning. We're starting to see the industry raise money, and we're starting to see some speculative deals, such as Norsk Hydro buying Spinnaker. But we haven't yet seen full capitulation by institutional investors. That's when people say, "If you don't own energy, you underperform, and if you underperform, you lose your job."

Q: Now you're starting to sound like a contrarian again.

A: My style is to own what I would call best-of-breed companies. So I'll be slightly contrarian when I move to de-emphasize energy and to emphasize groups that are improving, but I think we're still in the improving stage for the energy sector. Until you see irrational capital spending in the industry, I think we're okay.

Everyone's talking about how big-capitalization stocks are due for a comeback. The surprise may be that the stocks to own are ExxonMobil and Chevron, which are underowned, rather than General Electric and Microsoft, which everybody and his brother owns.

Q: Who has the vision in the energy business?

A: EnCana, a Canadian exploration-and-production company, is one of my biggest holdings. In May 2000, I show up at a meeting of Alberta Energy management. So I start talking with the CEO, a guy with gray hair who looks very experienced. I ask some basic questions, such as "How do you make money in the energy business?" and he starts talking about how it's a capital-intensive business. You want long-life reserves because if you're going to plunk down $1 billion up front, you want that $1 billion to work for you for 20, 25 years. Anyway, I liked the guy -- his name is Gwyn Morgan -- and the company had some good growth prospects, and I bought a little stock. Eventually, Gwyn merges Alberta with PanCanadian, which had this massive acreage in Canada, and creates EnCana. Gwyn is a visionary explorer who's looking for elephantine energy fields that allow him to leverage all his capital and his expertise. He does another acquisition and another, and now he's sort of on top of the world as gas prices go through the roof.

P.S. LTIR = Long term investment relationship.