Vanguard Energy Move

We recently made some changes to some client’s holdings in the Vanguard Energy fund. The fund was supposed to be a hedge to inflation as well as a proxy for commodity prices (oil) and give us upside potential when the price of oil goes up. It did that for most of the past five years we held it (see blue line below). Lately though the price of oil and the mutual fund have moved differently because of the funds largest holding Exxon (see red line). Exxon’s performance has not done very well resulting in Vanguard lagging other energy related funds.

 The fund also has drillers, retail portions of large energy companies, etc in it so it dilutes the impact of owning the commodity. We chose to move into BP Royalty Trust (see green line) which more accurately reflects the price of oil and we hope will be a better hedge against inflation and rising oil prices caused by emerging markets demand. The rising dollar has also had a recent impact on both investments, but we think that will be somewhat short lived once Greece issues get out of the headlines.