A Big Surprise From Mutual Funds

Steve McDonald
by Steve McDonald, Bond Strategist, The Oxford Club


There are two things I am absolutely certain of. First, next April 15 I will be writing a check to the IRS. And second, natural gas will be the primary fuel for the next 100 years.

Well-positioned gas companies will be golden for many years to come, and no one is doing it better or has more potential than Chesapeake Energy (NYSE: CHK).

I know they have had a tough road for the last year or so, but Chesapeake is set to be one of the biggest and best once again.

It recently blew away earnings and year-over-year comparisons.

The company had a 67% year-over-year increase in earnings, a 42% increase for the same period in revenues and beat earnings and revenue estimates.

Natural gas liquids production was up 9% year over year, oil production was up 56% and, for the same period, Chesapeake lowered production costs 26%.

And, most notably, 85% of its drilling is focused on oil plays, which brings a much higher price than natural gas.

Now, I know Chesapeake has had a funding gap that has been at the root of most of its problems for the past year, but it has already met one half of its assets sales goal in just the first quarter of this year. It did it by selling drilling leases that are about to expire on undeveloped gas properties.

Chesapeake has been able to solve its funding problems by selling drilling rights that will not affect its future performance, and it still owns 14 million acres of gas and oil rights.

In fact, the company’s production growth rate for the past few years is 15% to 20% in spite of the sale of assets.

Seventy-eight percent of its 2013 gas production is hedged at a price that’s one dollar higher than the best price the company got last year, and its production costs in the first quarter are down 18% from last year.

And, to top it all off, Chesapeake recently won a big lawsuit involving its bonds and - this is beginning to sound like a wishlist - there are rumors that Chevron (NYSE: CVX) or Exxon (NYSE: XOM) could make a buyout offer. A buyout is unlikely but, as we all know, rumors like these drive the stock price.

You must own companies in the gas business, and Chesapeeake is my favorite.

A Big Surprise From Mutual Funds

For the 30 years I have been in the markets, the one rule for mutual funds that seemed to be cast in stone was not to chase short-term performance. In other words, you had to look at the long-term performance of funds to make a good choice.

Well, so much for cast in stone in the markets.

A recent article in The Wall Street Journal cited data since the collapse in 2008 and 2009 that indicates short-term performance - one-, three-, six- month and one year - is a much better indication of future returns. And it’s by a big margin.

The study tracked the performance of 300 mutual funds since 1999. It clearly showed that focusing on the one- to 12-month performance periods returned 12% annually since 1999 as compared to 3.5% for the S&P 500. And, returns got progressively worse as the length of the performance period increased.

A caveat to the findings is this system worked best with no load funds and less-risky funds. Look for funds with risk levels equal to the overall market. But the cheapest funds in this study were not the best performing.

In fact, the study concluded that investors are too focused on costs and not enough on returns... and it is costing them money. They lose it on the other end of the equation.

No one was more surprised by these results that I was. This is earth-shattering for the mutual fund world.

The “Slap in the Face” Award: An Expensive Umbrella

For the better part of the last 22 years, rain or shine, I have walked to work, about two miles each way. And in that time I have lost, left behind, broken or had the wind blow apart at least 100 umbrellas. And umbrellas are the point of this week’s Slap in the Face Award.

In fact, it’s an $1,800 umbrella

The Fox Company of London sells an umbrella that costs $1,800. It has a silver handle with black beech for its shaft.


If you remember the TV show The Avengers, a Fox umbrella was always in the hand of Steed.

But, no matter what the materials are, or who carries them, you can still leave it in a restaurant, a doctor’s office or a hundred other places. The wind will still blow it inside out and break the little parts that hold the fabric up and another person can innocently pick up one of a thousand black umbrellas, which is what the Fox is, and leave you his $10 one.

I can think of a lot of things to do with $1,800; an umbrella is not one of them. If I had purchased Fox umbrellas, I would have spent something in the area of $36,000 on umbrellas over the past 22 years. I haven’t spent that much on cars in the last 20 years. But, that’s another story.

We really have too much money to spend.

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