Mutual Fund Site

Back in November, we took at look at Top Holdings Among Equity Funds and found that Apple, IBM and Google were among the favorites. Now, with more powerful research capabilities, we have been able to take a deeper look into the 40+ equity mutual funds that we we cover at the Site and we have discovered an interesting shift from those high-flying tech players into something that most might find a little surprising: oil companies.

We would have been among the first to question the allure of oil companies. As with the rising oil prices we saw in 2007, it makes sense why so many people (even us) would expect the current price of oil to drop. And with it, the price of oil company securities. After all, the conflict in Lybia will someday come to an end and with little end in sight for greener forms of energy, it appears that oil will gradually lose its market appeal. In other words, a slowing demand for this commodity should result in weakness in its price, especially over the long term. Makes sense, right?

Not a Question of Demand

But here’s the kicker when it comes to looking at oil, and we admit we had it all wrong before. Instead of looking at demand as the key driver to price, let’s look at the other economic variable: supply. The companies that get this right will reap some fairly handsome rewards and if investment funds like the Vanguard Dividend Appreciation Fund (VDAIX) are right, then its investors are sure to enjoy the profits as well.

There is actually a very important distinction to be made between supply and demand. See, demand is what people want. The more people want, the more the price will increase. But we cannot ignore supply. Many believe that the supply part of the equation is vital here. No longer are we making big reserve discoveries. This places heightened pressure on existing reserves. While abundant, these reserves are indeed limited. So even if demand falters at remarkable rates, the existing supply will only get smaller… dangerously so. This makes oil a very valuable resource, one that is bound to increase in price.

Updated 4/18/2011 – The CEO of Exxon Mobil, said the high price of oil is not a matter of supply according to an interview in today’s USA Today. However, he speaks to political instability and conflict in oil-rich countries as a threat to the long-term price – Editor.

Exploring the Vanguard Dividend Appreciation Fund

Interestingly, this Vanguard dividend fund has just barely surpassed the S&P 500 in terms of its 1-year trailing and YTD returns. Here is its YTD chart — nothing spectacular at a glance, sure…

But at the end of the day, this equity fund has still outperformed the Index and Morningstar seems to agree with us that this strong fund is indeed, well, strong — it’s Morningstar rating of 5-stars tells us as much.

What a lot of people may not know (but surely suspect by now) is that its largest equity holding is Chevron. Its third largest equity holding is Exxon Mobil. Dig a little deeper and you will find EOG Resources and Murphy Oil among its Top 50 list. This focus on the Energy sector is not limited to the Vanguard fund.

Top Holding Among Equity Mutual Funds

In fact, in our latest poll, the single most widely held security among the funds we cover at the Mutual Fund Site is Chevron. Exxon Mobil is a close runner up, appearing in the Top holdings of 7 different equity funds. These two energy plays are among the largest and most popular among investors, so to find them just as popular among institutional investors is definitely interesting.

And speaking of interesting, take a look at which equity funds hold both Chevron and Exxon in addition to the Vanguard Equity Dividend Fund:

BlackRock Equity Dividend (MDDVX)

This lower risk equity dividend fund has been a holder of Exxon for quite some time. In February when Exxon announced an earnings of 57%, we pegged this fund as one of the benefactors. The chart below shows that this fund has certainly done well on a YTD basis, recently pulling away nicely from the S&P 500.

As it stands, Chevron is the fund’s top holding – when we last looked at it, that top spot belonged to JP Morgan, which is now the fund’s 5th largest equity holding. Exxon occupies the 4th largest holding here.

ING Equity Dividend (IEDAX)

When we looked at the ING Equity Dividend fund almost a year ago, its top holdings belonged to Qwest Communications and Du Pont. Today, Chevron represents the fund’s top holding and Exxon takes the 4th largest, just like the BlackRock fund (above).

This fund’s performance has stuck close to the index, but still it has managed to eek out a small lead. Does the presence of both Exxon and Chevron have anything to do with that?

Fidelity Fund (FFIDX)

As one of those solid performers, the Fidelity Fund also holds both Chevron and Exxon. In this case, Chevron occupies this equity mutual fund’s second top holding and Exxon represents its 7th largest position. When we first started watching this fund, we thought its heavy Apple position was a risk factor. We definitely believe that today. But this is a strong mutual fund all the same. As a holder of both Chevron and Exxon, these energy plays represent the fund’s second and seventh largest holdings respectively.

Vanguard Dividend Growth (VDIGX)

The Vanguard Dividend Growth fund also holds both Chevron and Exxon, but these securities are relatively small positions for this fund, as the 15th and 10th largest holdings, respectively. With a low risk profile and above average returns, it is no surprise that this fund has earned 4 stars from Morningstar.

This fund’s performance record speaks for itself. It demonstrates the strengths of this fund, in our opinion and also justifies why we felt it was our Top Dividend Fund pick in 2010.

Vanguard Wellington Fund (VWELX)

As one of Vanguard’s flagship mutual funds, the Vanguard Wellington Fund has a lot to prove. This fund has been a quiet favorite of ours for some time, mostly because of its popular holdings in leaders like IBM and Johnson and Johnson. Now, Exxon and Chevron represent this fund’s 3rd and 4th top holdings. This 5-star mutual fund sends a very powerful message about how strongly it feels in these securities.

As the only equity mutual fund to have underperformed the Index, the Vanguard Wellington fund still represents a huge opportunity for long-term investors, in our opinion.

Summary

These five mutual funds have a strong equity focus. Their performance has not been terrible by any measure and their Chevron and Exxon Mobil holdings illustrate an interesting fact about the current state of the market an economy. If their YTD numbers are any indication, continued to returns should come as no surprise for all five.