What are we looking for?
Given that oil is trading near $100 (U.S.) a barrel amid turmoil in the Middle East and North Africa, let's see how energy funds have fared this year.
The screen
We screened for the 15 best performers from Jan. 1 to Feb. 24. U.S. dollar and duplicate versions of funds were excluded, as well as leveraged exchange-traded funds. We also left out funds sold only to accredited investors.
What did we find?
Many of the top gainers own a whack of junior oil and gas stocks. These smaller-cap companies are more leveraged to rising commodity prices than bigger firms.
Ark Aston Hill Energy Class, which has 97 per cent in small- and mid-cap stocks, emerged at the top of our list with a 14.5-per-cent gain. While the fund holds many gas stocks, some of those "juniors are shifting to an oil focus with their new drilling," said Joanne Hruska, a portfolio manager with Aston Hill Financial Inc. "I prefer the oil story, but find considerable value amongst the gas names."
Some of her recent winners include Twin Butte Energy Ltd., Fairborne Energy Ltd. and Palliser Oil & Gas Corp. "We could easily see a $10 to $20 drop [per barrel]in oil prices" if the unrest in the Middle East subsides, but prices will eventually creep back up to the $100 level because of tight supplies, she said.
Qwest Energy Canadian Resource Class, which came second with a 14.2 per-cent gain, is a mutual fund whose assets have been rolled over from a flow-through limited partnership invested mainly in junior oil stocks. (New investors cannot buy this fund.) Big gainers this year include Surge Energy Inc., Bellatrix Exploration Ltd. and Americas Petrogas Inc. Manager Don Short has been taking profits in his energy names in case there is a pullback, and has boosted his cash to 15 per cent of the fund.
The benefit of owning smaller rather than large-cap names in a rising price environment is evident in BMO's ETFs. BMO Junior Gas ETF and BMO Junior Oil ETF are up 12 and 11.5 per cent, respectively, while the larger-cap BMO S&P/TSX Equal Weight Oil & Gas ETF has risen only 9.3 per cent.
The BMO Junior Gas ETF benefited from rising gas prices in January because of colder weather. It also stands to profit from the market's expectation that there will be more merger activity among juniors, said Alfred Lee, investment strategist at BMO ETFs.
The accompanying table has been corrected from an earlier version.