The last time energy stocks experienced a period of sterling performance like that of recent quarters was from 1996 to 1998. As a result of the turmoil, the institutional ownership base of the sector has gone through significant changes. Using 13F filings with the Securities and Exchange Commission, it is possible to follow overall changes in ownership style in the energy sector. For each sector component, we looked at 13F information on a quarterly basis, using the price fluctuations of the various indices as a guideline for significant comparison points. Looking at the energy sector's general index, the style of the institutional shareholder didn't change since the second quarter of 1998, but the size of the institutional investments did. In the first quarter of 2000, there was a sharp upswing in the amount of investment dollars flowing into the sector, with oil-service firms capturing the brunt of investors' attention. While the influx of investment capital slowed slightly in the second quarter for most sectors, it accelerated into the exploration and production (E&P) group, as the strong commodity outlook and concerns with the technology sector dominated investor consciousness. In 2000's second quarter (the latest for which we have detailed data), institutions invested $349 billion in the S&P Energy Composite, a 40% increase from a $245-billion investment made during the last upturn, in 1998. Why the big increase? It was partly due to the general expansion of the stock market since 1998, and a larger trading scope of institutional investors. When examining flows of capital, Thomson Financial/Carson Group analyzed the net change in value from quarter to quarter, which indicates where the investment dollars are going within the sector. In the last three years, the general composition of the institutional investor in the energy group has remained the same, even after the industry's downturn in 1998-99. On a comparative basis, Fidelity Management & Research is still the largest investor in the energy group (8% of total institutional investments in second-quarter 2000, as opposed to 6.8% of total institutional investments in 1998). Other large investors in the energy group that have kept their relative involvement the same are Barclays Global (Index), State Street Global Advisors (Index) and Capital Research & Management (Core Value). The "new" holders Out of the four different components in the energy sector, the style composition of E&P investors has experienced the most noteworthy changes. Since the previous highs in the fourth quarter of 1996, value investors and growth-at-a-reduced-price (GARP) investors decreased their E&P holdings 13%. As a result of these sales, there were declining and then flat levels of net capital flows into the E&P sector until the first quarter of 1999. (GARP is an investing style between that of value and growth, which looks for undervalued price-to-earnings ratios. Fidelity and J.P. Morgan are two firms that invest in this style.) It seems old memories die hard-the disastrous 1997-98 downturn in E&P equities is still haunting the markets. Value and GARP investors are still hesitant to invest in the group on a scale comparable to their 1996 commitments-even though oil and gas prices are at decade-long highs. Both GARP and value investors focus on buying and holding securities that have relatively low valuations and trade at a discount to the market. These investors traditionally take a more conservative approach. The 1997-98 drop in E&P prices displayed too much inherent risk in E&P valuations for their tastes. As a result, GARP and value investors now invest a smaller amount of funds in the energy group. In direct contrast to their hesitancy, growth-oriented institutions are the new investors in the E&P group, increasing their involvement 13% since 1996. Within the growth family of investors, there are more "core-growth" investors, specifically. Because these invest in companies with above-average earnings growth rates, they are willing to pay for higher valuations. The most active new core-growth institutions? As of June 30 (the latest quarter for which we have detailed information), they are MFS Investment Management, Putnam Investment Management, American Express Financial Advisors, Cadence Capital Management and Waddell & Reed Asset Management. In 1996's fourth quarter, Putnam Investment Management had $7 million invested in the E&P group, or 0.5% of the entire core-growth investor base. In 2000's second quarter, Putnam had $728 million invested in E&P stocks, or 13% of the total amount of core-growth investors, a 12.5% change. Ignoring possible internal effects of new portfolio managers, a change in asset base or different trading strategies, Putnam turned into one of the top core-growth E&P investors in the most recent cycle-possibly due to much-improved E&P fundamentals and improving management styles. Even though the overall amount of investment from core-growth investors has increased, some of these same investors were scarred by the downturn in 1998. Alliance Capital, State of Wisconsin Investment Board and Columbia Management are examples of institutions that scaled back their investments. In 1996, Alliance had $250 million in E&P stocks, or 16% of the core-growth base. In 2000, it had $72.9 million in E&P stocks, only 1.3% of the total core-growth investment. Alliance's lack of investment shows that some institutions, even within the same style group, turned away from the E&Ps due to the potential for a swift downturn. The discrepancy between Alliance's investment pattern and that of other core-growth managers highlights the varying valuation metrics that different institutions employ, be they assumptions based on commodities, share prices or fundamentals. The domestic integrateds During the last four years, the domestic integrated companies' ownership base has also changed, but not on a scale comparable to the E&P group's transformation. The new institutions in the stocks are now made up of more value investors, which added 7% to their domestic integrated holdings since 1997's third quarter. The largest new value investor? Sanford C. Bernstein, which had $3.1 billion in domestic integrated stocks on June 30, 2000, up 14.8% from third-quarter-end 1997. Bernstein now invests in all nine companies in the S&P Domestic Integrated Index, versus four in 1997. Bernstein's new involvement illustrates that institutions will behave differently within each energy sector component. After domestic integrated stocks hit a low point in the first quarter of 1999, Bernstein possibly reevaluated this component and saw some new value in the group as commodity prices continued to recover. Overall, the domestic integrated group has experienced a net decline of 8% in ownership by GARP managers. J.P. Morgan Investment Management lightened its exposure to the group substantially, moving from 8.6% in the 1997 third quarter to 3.4% this past June. Why did the GARP investors move away from this sector? It was due to a variety of concerns, ranging from the sector's exposure to downstream businesses, to the continued underperformance of the group relative to the rest of the energy sectors. Overall, the net level of investment dollars flowing into this domestic integrated group has increased at a relatively minimal rate, with the exception of a large increase in 1999's third quarter. The international integrateds International integrateds' stock is traditionally more resistant to most of the volatility that the other oil indices experience. In the last four years, the investment base of these companies hasn't shifted to the degree of the other averages. The only notable difference in the group in the last four years is the higher percentage of GARP investors, up 4% since year-end 1998. The larger percentage of GARP investors is due to new investment from institutions such as Fidelity Management & Research (up 2.2% since year-end 1998) and Oppenheimer Funds (up 3.3%). These new investors rotated into the "safer" blue-chip integrateds-stalwarts such as Exxon Mobil, Shell and BP-and away from volatility in the technology sector in 2000. Investors of this type are attracted to the economies of scale that the big integrateds have been able to achieve, based on the increased globalization of their activities, as well as a perception of sustainable growth in earnings per share. Net capital inflows peaked in 1999's second quarter and fourth quarter, as investors were attracted to consolidation within the sector. Oil services: The Big 'Mo' A breakdown of the institutional base holding oil-service stocks shows that the style of the investors is not necessarily affected by shifts in share prices. Instead, the most notable aspect of oil-service investors is the high degree of involvement from momentum investors. These investors are attracted to the rapid growth in earnings that oil-service companies exhibit in strong commodity cycles such as the one we are in today. However, the same factor that attracts momentum-oriented investors is one of the main reasons that the composition of oil-service investors has not changed significantly. Some institutions may hesitate to invest in a group dominated by momentum investors, considering the trading style creates larger price swings and more volatility. Momentum investors in the rest of the energy sector compose roughly 2% of the institutional base, but in oil services, they account for 6% of total institutional investments. The top three momentum investors in the group in 2000 were also the top three in the 1997 cycle: AIM Management Group, American Century Investment Management and Nicholas-Applegate Capital Management. The similarity of the momentum investors in 1997 and 2000 shows that they are attracted to the volatility of the oil-service group. Apparently, the 1998 downturn didn't change their trading strategy or affinity for oil-service stocks. Today more institutions are invested in the oil-service group, partly as a result of more attention on the energy sector in recent quarters-and the larger size of the institutional universe compared with that of 1997. Another factor may be that the sector's downturn in 1998 caused the oil-service companies to reevaluate strategies, address their fundamentals and approach investors differently. Too, the increased U.S. and international rig counts are proof positive that higher oil and gas prices eventually lead to higher earnings for the service companies. There is now a larger degree of institutional investment in the sector because institutions are more comfortable with investing in oil services due to new hedges and conservatism against any future downturn. Institutional investment in the group will continue to increase if the companies perform in a consistent pattern, rather than the boom-and-bust cycle, which characterized oil-service investments in 1997. Not surprisingly, the oil services have experienced the highest degree of volatility in net capital inflows of the energy sector. As of this past March 30, oil-service firms had benefited the most from the increased level of attention to the energy sector. That's true in terms of an increase in investment dollars, as a result of investors' perception that the oil services are the most highly leveraged to better crude oil prices. In the most recent quarter, capital inflows into the group had slowed slightly. Tate Sullivan and Ian Synnott are energy sector consultants for Thomson Financial/Carson Group, New York. The firm specializes in investor relations consulting and capital markets intelligence. Sullivan can be reached at 212-707-0736. INVESTING STYLES DEFINED Some institutions and mutual funds have multiple investment styles, but their dominant style is used to manage the predominant amount of capital under their control. To classify dominant styles of an institutional investor, Thomson Financial/Carson Group uses quantitative analysis based on key financial fundamentals of an investor's portfolio. The primary measures are the portions of the portfolio above the weighted average of the S&P 500 for price-to-earnings (PE) ratio, dividend yield, price-to-book ratio, and five-year estimated earnings per share (EPS) growth. All four fundamentals are used to define each style. To be classified in a given style, an institution must generally meet all the criteria. In some cases, however, the securities that an investor is buying and/or selling currently provide a better indication of its true investment style. In some cases, a portfolio is not available for a given investor, so we apply our unique knowledge of the investor's behavior to classify its dominant style. For global investors, a specific style has been given based on a review of the North American securities in the portfolio. There are 11 dominant investment styles by which a firm can be classified: Momentum These institutions invest in stocks when the earnings, earnings estimates or prices are advancing faster than the market or other stocks in the same sector. These investors look for stocks experiencing upward earnings revisions or positive earnings surprises. Momentum portfolios have very high turnover due to a short-term focus. These investors will liquidate positions at the slightest hint of disappointment. Aggressive Growth This is an extreme version of the growth style. These investors primarily hold stocks in companies that are either growing extremely quickly, are in an early stage of the life cycle, and/or have minimal or no current earnings. In general, these investors have higher portfolio turnover than others. They react quickly as new information becomes available that is either positive or negative concerning growth rates. Growth Growth investors bridge the gap between aggressive-growth and core-growth styles. They tend to be slightly more aggressive than core-growth investors, willing to pay slightly higher multiples for stocks and trade at a more active pace. They look for companies growing at superior rates versus the general market, but they are not willing to pay for extremely high multiples. Core Growth These managers invest in large, blue-chip companies that historically perform at, or near, the top of the S&P 500 in terms of earnings and revenue growth. These investors are often willing to pay up for these blue chips, buying issues that trade at higher PE and price-to-book multiples. Pharmaceutical and consumer-products firms often are heavily weighted in core-growth portfolios. These investors have a long-term investment horizon and a buy-and-hold strategy. Growth at a Reasonable Price (GARP) These investors try to hold securities that trade at a discount to the market, but are expected to grow at a rate higher than the market average. This is a more conservative style than an outright growth strategy. Dividend yield is generally not a concern of GARP investors. Core Value The focus of these investors is to buy at relatively low valuations on an absolute basis or in relation to the market or historical levels. Value portfolios typically exhibit below-average PE, price-to-book and price-to-cash flow multiples. Growth and profitability are frequently below-market averages, but with an expectation for improved performance. These investors typically invest in industries such as energy and financials, which trade at discounts to the general market, but perform consistently over the long term. They also employ a buy-and-hold strategy until valuations start to approach or exceed market multiples. Deep Value This is a more extreme version of value investing characterized by holding stocks with extremely low valuations, often of companies or industries that are out of favor. Some investors in this category are known for agitating for change such as new management, the sale of assets or a spin-off. This group is sometimes categorized as contrarian, as they usually invest in companies when the rest of the market is negative on the same prospects. Income Value These investors are similar to those in the core-value category except they place an emphasis on buying issues with higher-than-average dividend yields. Yield These investors focus on companies with yields that are well above average and that have the ability to continue making or increasing dividends. They tend to focus on income and safety more than capital appreciation. Index These investors generally create portfolios designed to match the composition of a broad-based index such as the S&P 500, the Wilshire Small Cap or the Russell 3000. Therefore, performance and risk mirror the general market. Decisions are driven by the indices, not by an evaluation of the companies or their securities. Specialty Specialty investors tend to have a narrowly defined investment universe. Examples include investors who specialize in specific industries or hold a particularly high concentration of a single stock or a very small set of stocks, or convertible securities. This category is reserved for investors with predetermined biases toward certain companies, industries or sectors, regardless of their financial characteristics.