Money Managers Curb Energy Enthusiasm

On the heels of a similar warning earlier this month from Valley Forge, Pa., fund giant Vanguard Group, the nation's financial planners and analysts say they're advising clients to stay out avoid the energy patch at all costs.

Energy sector mutual funds have enjoyed spectacular gains this year, as natural resources funds, the biggest element of which is energy, are up by 34%; and have taken in scads of money, about $9.5 billion in cash this year through August, according to a report from The Wall Street Journal. Damage from hurricanes Katrina and Rita are pushing fuel prices even higher, so additional gains could be witnessed in September.

But experts say the party is over and are comparing the current environment to the tech stocks of 1999, just before the bubble burst.

"You never do well chasing the current news," said Don Cassidy, an analyst at the Denver fund tracker Lipper. "If you look at the historical data on fund flows, though, we know that's exactly what people tend to do."

That's also exactly why smarter money manages are moving their clients elsewhere.

John Evans, a financial planner at Cincinnati-based Truepoint Capital, began liquidating his clients from the sector six weeks ago, after collecting a 30% after 12 months of exposure.

"We wanted to capture gains there," he told the Journal. "To us, the remaining upside potential at that point in the market's rally did not outweigh the downside risk."

Don Hodges, chairman of Hodges Capital Management, still has a big stake in the sector. But Hodges, who also manages individual portfolios, is cautioning investors not to join now and "to keep some cash on hand so they can buy on the pullbacks."

ProFund Advisors, meanwhile, recently launched two funds that bet against energy and another red-hot sector, real estate.

"Our investors have asked us to create additional opportunities for when they believe a sector of the economy will cycle downward," said ProFund Chairman and CEO Michael L. Sapir.

The staff of Money Management Executive ("MME") has prepared these capsule summaries based on reports published by the news sources to which they are attributed. Those news sources are not associated with MME, and have not prepared, sponsored, endorsed, or approved these summaries.