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Energy's Motor May Have Just Gotten Started : Funds: It doesn't usually pay to bet on last quarter's winners, but some analysts believe an up trend in natural resources is developing.


More often than not, chasing the hot funds of the previous quarter leads to trouble. A particular market sector that bursts onto the scene one quarter often quickly fades the next.

Gold funds, the first quarter's big winners, are especially vulnerable to big up-and-down swings. Lexington Strategic Investments, a gold fund that rocketed 72.7% in the first quarter, may look tantalizing--until you realize that it lost 60.7% of its value last year.

When a fund leads the market for 12 months, however, flash-in-the-pan talk stops--and Wall Street starts focusing on the possibility that a long-term trend is developing.

In that respect, energy funds may be where financial services funds were 2 1/2 years ago: ready to roll, after a long period of sub-par performance.

The funds, grouped under the category of natural resources, have gained an average 19.9% over the last 12 months, fourth-best of 23 major fund categories. Yet for the last five years, the group is up just 49.2%--about half the average general stock fund's gain.

Why believe that energy stocks have begun a long-term up trend? Dan Rice, manager of the MetLife-State Street Global Energy fund in Boston, argues that this year's cold winter in much of the country exposed the natural gas industry's growing imbalance between supply and demand.

Gas prices, he notes, are up more than 50% from a year ago as gas reserves have been drawn down to meet supply. More important, after years of cutbacks in domestic drilling, replacing reserves will be no easy trick going forward, Rice contends. The result, he says, is that gas suppliers are finally regaining pricing leverage lost in the energy sector crash of the '80s.

"We think this positive natural gas cycle will last at least three more years," Rice says. For that reason, his $25-million fund is stocked with smaller energy and drilling firms that Rice believes can reap the biggest rewards from rising demand and higher prices.

The strategy has worked well for the last year: Rice's fund was the best performer of more than 1,400 stock funds in the 12 months ended March 31, up 56.2%. About two-thirds of that gain came in the first quarter.

Among the stocks Rice owns: Phoenix Resources ($30.25 on Friday, American Stock Exchange), Nuevo Energy ($22.50, New York Stock Exchange), Global Marine ($3.375, NYSE) and Western Co. of North America ($11.75, NYSE).

While conceding that small energy stocks can be volatile, Rice argues that these companies are only beginning to blossom again, after 10 years in the doghouse. "We think the mistake will be to sell too soon," he says.

His fund, which carries a sales charge, can be reached at (800)-882-3302.

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