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Number Cruncher

Contrarian approach to natural gas fuelled top fund's gains Add to ...

What are we looking for?

Natural resource equity funds that are still in the black. The sector has taken a hit from falling commodity prices as the global economy has slowed.

The screen

We looked at the year-to-date returns of funds in the natural resource equity category to Nov. 18. U.S. dollar, segregated and duplicate versions of the funds were excluded.

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What did we find?

A handful of energy-focused funds still posting positive numbers.

Middlefield Groppe Tactical Energy fund topped the list with an 8.7 per cent gain followed by Bissett Energy, up 7.9 per cent, and BMO Junior Gas ETF, up 7.1 per cent. Of course, on any given day, these leaders may change rankings.

Rob Lauzon, a portfolio manager who oversees Middlefield Groppe Tactical Energy, has taken a “more contrarian” approach with his bullish outlook for natural gas prices. He has about 75 per cent of his portfolio in gas stocks and the rest in the oil sector.

His asset allocation reflects research from long-time oil and gas forecaster Henry Groppe of Houston-based Groppe Long & Littell, who is a natural gas bull.

The fund has been able to outperform because it owns natural gas companies producing so-called “wet gases” such as ethane, propane and butane, whose prices track crude oil more closely, said Mr. Lauzon, a manager with Middlefield Capital Corp.

Crude oil futures climbed back to over $100 (U.S.) a barrel in New York on Nov. 16, but have since retreated to the $95 range. Open Range Energy, Trilogy Energy, Tourmaline Oil and Celtic Exploration are among the top holdings in the portfolio, Mr. Lauzon said.

The manager expects natural gas prices to move to between $5 and $6 per 1,000 cubic feet (mcf) next year from the current range around $3.50 per mcf. “The cure for low gas prices is low gas prices,” he said. As supply starts falling as a result of the slowdown in drilling that has taken place since gas prices declined, prices will rise, he suggested.

Mr. Lauzon expects the price of oil to be in the $80- to $90-per-barrel range in the near term. “That doesn’t make me bearish [on oil]” he said. “It is just that there is more upside to natural gas … than something trading sideways over the next year.”

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