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Columbia Energy and Natural Resources Fund
Predecessor Excelsior Fund: Energy and Natural Resources Fund
Market Overview
Despite weak underlying supply-and-demand fundamentals, crude oil prices remained elevated at the $70 per barrel mark, as investors migrated into crude oil as an asset class to hedge against a falling U.S. dollar and inflation concerns stoked by the federal stimulus package. For the nine-month period ending September 30, crude oil prices soared 58% from $44.60 per barrel to $70.61. Absent a geopolitical event, the recent price rise appears unsustainable, evidenced by weak U.S. gasoline demand and soaring distillate inventories, in that diesel and jet fuel storage levels are near record highs, a function of anemic truck and airline traffic volumes.
In contrast, during the quarter, natural gas prices tracked poor fundamentals, down 13% from $3.72 per 1,000 cubic feet (McF) to $3.25 per McF, and down 42% year to date from the 12/31/08 closing price of $5.63 per McF. While world crude oil supply is structurally constrained, the newly emerging U.S. natural gas shale plays — notably Barnett, Marcellus, Fayetteville and now Haynesville — have been game-changing in terms of boosting domestic natural gas supply. The U.S. natural gas land- rig count is now down 56% from the August 2008 peak of 1,606 rigs to 712 as of October 2, 2009. We believe that natural gas prices will recover in the fourth quarter to the $5-to-$6 per McF mark in December based on falling natural gas supply and the onset of winter. The major determinants of price moves during the first quarter of 2010, however, will be the level of producer-supply response to higher prices coupled with two demand variables, the severity of winter weather with respect to residential heating load and a potential rebound in industrial demand.
Fund Performance
During the third quarter, the fund outpaced both the S&P North America Natural Resources Index and the S&P 500 Index, which gained 17.34%.and 15.61%, respectively. For the nine-month year-to-date return, the fund also outperformed the S&P North America Natural Resources Index and the S&P 500 Index, which returned 29.03% and 19.26%, respectively.
Contributors 1
During the quarter, outperformers included small-cap oil producer Brigham Exploration, up 159% due to drilling successes in the Bakken oil play; specialty chemicals producer, Solutia, up 101%; metallurgical coal producer Walter Energy, up 66% on rising coking coal exports to China’s steel mills; Sandridge Energy, up 52%; small-cap natural gas producer Exco Resources, up 45% because of early success in the Haynesville Shale; and natural gas producer Chesapeake Energy, up 43% due to continued success ramping up production in the Haynesville and Marcellus shale plays.
Detractors 1
Laggards included XTO Energy, up 8%; Chevron, up 6% because of weak refining and marketing margins; Plains Exploration, up 1% due to a dilutive equity issue; and Hess, down 1% on poor exploration results.
Portfolio Activity
During the quarter, we reduced our weighting in the major integrated oils category from 18.5% to 14% via the sale of ExxonMobil and trimming of our position in Hess due to extremely weak downstream (refining and marketing) results. The downstream division typically accounts for 20% of company earnings but is now struggling to reach break-even levels, given high crude oil input costs and anemic end-product demand. We also reduced our weighting in the natural resources segment from 32% to 29% via the sale of 3M, Consol Energy and Monsanto (because of generic competition for its Roundup weed control product).
We initiated positions in coal producer Alpha Natural Resources postmerger with Foundation Coal to capitalize on rising metallurgical coal demand from China, and we purchased Dow Chemical to position the fund for a rebound in industrial demand. We also added Agnico-Eagle and Goldcorp to our lone position in Barrick Resources, as investors increasingly focused on gold as an inflation hedge.
In anticipation of a rebound in natural gas prices (which approached seven year lows in September) and to capture upside in strong oil prices, we raised our overweighting in the independent oil and natural gas producers from 31% to 33% of total assets. We sold our positions in two large-cap producers — Devon and Noble Energy — to fund new positions in two mid-cap producers — Continental Resources and Range Resources — and two small-cap producers — Concho and McMoran. Earlier in the quarter, we sold our positions in Arena and Gasco Resources.
Outlook
In summary, we are positioned for an eventual global upturn in the economy via exposure to the energy sector and a 29% weighting in natural resources such as copper, iron ore, metallurgical coal and stee, which are indirect plays on the emerging market demand, notably China.
Performance data quoted represents past performance, and current performance may be lower or higher. Past performance is no guarantee of future results.
Please read and consider the investment objectives, risks, charges and expenses for any fund carefully before investing. For a prospectus, which contains this and other important information about the fund, contact your Columbia Management representative or financial advisor or go to www.columbiamanagement.com.
The S&P North American Sector Index provides investor with a suite of equity benchmarks that represent U.S. traded securities across seven broadly defined economic sectors: consumer, cyclical, financial services, health care, natural resources, technology, and utilities. Standard & Poor’s uses the Global Industry Classification Standard (GICS®) to determine a company’s sector classification.
The Standard & Poor’s (S&P) 500 Index is an unmanaged index that tracks the performance of 500 widely held, large-capitalization U.S. stocks.
Unlike mutual funds, indices are not investments, do not incur fees or expenses and are not professionally managed. It is not possible to invest directly in an index. 1Determinations of contributors and detractors are based on performance relative to the fund’s benchmark.
Since economic and market conditions change frequently, there can be no assurance that the trends described here will continue or that the forecasts will come to pass. The views and opinions expressed are those of the portfolio managers and analysts of the affiliated advisors of Columbia Management Group, are subject to change without notice at any time, may not come to pass and may differ from views expressed by other Columbia Management associates or other divisions of Bank of America. These materials are provided for informational purposes only and should not be used or construed as a recommendation of any security or sector.
There is no assurance that any securities discussed herein will remain in an account’s portfolio at the time you receive this report or that securities sold have not been repurchased. It should not be assumed that any securities transactions or holdings discussed were or will prove to be profitable, or that the investment recommendations or decisions made in the future will be profitable or will equal the investment performance of the securities discussed herein.
Columbia Management Group, LLC (“Columbia Management”) is the investment management division of Bank of America Corporation. Columbia Management entities furnish investment management services and products for institutional and individual investors. Columbia Funds are distributed by Columbia Management Distributors, Inc., member FINRA and SIPC. Columbia Management Distributors, Inc. is part of Columbia Management and an affiliate of Bank of America Corporation. |