The oil spill in the Gulf of Mexico, resulting from the April 20 explosion on the Deepwater Horizon offshore oil-drilling platform, is shaping up to be one of the most catastrophic environmental disasters in U.S. history.
Various attempts to contain the underwater gusher have had limited success until recently, and oil from the spill has started to damage wildlife along the Gulf Coast of Louisiana. An attempt to cap the well using the “top kill” method has shown promising results so far, but even if this works, the environmental and economic impact of the spill is likely to last for years.
The spill has been a public-relations debacle for British oil giant BP (BP), which was leasing the platform and is responsible for most of the containment and cleanup costs. Those costs have been about $15 million per day so far, but that number could easily rise, and it doesn’t include fines and various other costs. BP’s stock fell about 30% in the month after the accident, and while it has rebounded a bit after promising news from the efforts to plug the leak, it’s still down more than 20%, more than the broader market and other integrated oil giants.
Shares of Transocean (RIG) the oil-services firm from which BP was leasing the platform, have also taken a hit due to similar cost and liability issues, combined with expected restrictions on offshore oil drilling in the wake of the accident. In fact, uncertainty stemming from the spill has contributed to poor relative stock performance over the past month by most of the major offshore drillers, including Diamond Offshore Drilling (DO), Noble Energy (NE), Ensco (ESV), and Pride International (PDE).
These stocks are widely held by mutual funds, and we ranked the funds in our database to get an idea of which are potentially the most affected. The first table below shows the 10 funds with the highest percentage of their portfolio in BP, and the second shows the 10 funds with the highest percentage in the five offshore drillers mentioned above. In both cases we’ve excluded clone funds and those with less than $100 million in assets, and in the second case we’ve left out sector funds, which would otherwise dominate the list. In both tables we show each fund’s percentile rank in its category over the past month (roughly since the spill started), and over the past year.
These funds do not appear to have been hurt much by the fallout from the oil spill. Seven of the BP-heavy funds have beaten their category over the past month, and several of them have significantly better one-month relative returns than one-year relative returns. The driller-heavy funds have not done as well overall, but the fund with the most exposure to the five drillers, Federated Market Opportunity (FMAXX), has been one of the world-allocation category’s best performers over the past month after lagging for most of the past year. This lack of a pattern probably reflects the fact that the relevant stocks only make up 3% to 5% of these funds’ portfolios, not enough to counter the macroeconomic forces weighing down markets over the past month. The strongest one-month performers have mainly been cautious value funds such as Legg Mason ClearBridge Equity Income Builder (SOPAX), while the worst have been aggressive growth funds such as Pin Oak Aggressive Stocks (POGSX), reflecting the market’s recent flight from risk.
Setting aside the varied short-term results, there are some very good funds here. FMI Large Cap (FMIHX), the fund with the most exposure to BP, is one of our favourites in the large-blend category, with a concentrated portfolio and one of the category’s best records since its December 2001 inception. The biggest holders of BP also include another couple of funds that are top choices in their respective peer groups: Vanguard Energy (VGENX) and MainStay ICAP International (ICEUX). The list of funds with the most exposure to the offshore oil drillers includes a legendary value manager, Steve Romick of FPA Crescent (FPACX, as well as a legendary growth skipper, Tom Marsico of Marsico Focus (MFOCX) and Marsico Growth (MGRIX).
So some smart fund managers have found BP and the offshore oil drillers to be attractive investments recently, but these numbers are mostly based on portfolios from March 31, before the accident that led to the spill. We wouldn’t expect these managers to dump these stocks at the first sign of trouble, given that most of them tend to take a long-term perspective, but they’re undoubtedly watching developments in the Gulf closely.