In every bull market, certain segments do better than others. The great performance that emerging-market and small-cap stocks have turned in over the past five years is old news by now. But another area of the market has quietly racked up some impressive gains of its own in recent months: natural resources.
Natural performers
According to Lipper data, mutual funds focused on natural resources posted a 14.7% gain in the second quarter of the year. That brought these funds' one-year trailing return through June to 22.2%, compared with just 6.3% for the S&P 500 Index. Strong worldwide demand, especially from fast-growing markets such as China and India, has boosted the share prices of the stocks in which these funds invest.
Not all natural-resources funds have benefited equally, however. Funds focused on energy and metals and mining have gained the most ground, while timber funds have been hammered by a slowdown in the U.S. housing market. In general, higher commodity prices are expected to persist, further fueling these stocks' fire.
But if you're thinking you should run out and pick up a natural resources fund for your portfolio right now, slow down, cowboy! Don't jump the gun just yet.
Unnatural selection
In my opinion, few investors have legitimate reasons for owning funds that focus exclusively on natural resources. As with most specialty mutual funds, the majority of dollars flowing into these funds' coffers are purely speculative. Commodities are a very volatile sector of the market, and they're likely to produce eye-popping gains one quarter, and stomach-churning losses the next. Investors are tempted by the possibility of hitting it big with some of those outsized gains. As a result, they're more likely to invest as a gamble to juice returns, rather than filling any real need their portfolio might have for significant exposure to commodity stocks.
Owning even one or two diversified large-cap stock funds should give you enough exposure to the natural-resources sectors. Adding another specialized fund atop that will only unbalance your portfolio.
Drilling down
There's one more significant obstacle to buying a decent natural-resources fund: Most are relatively new, so they lack a longer-term track record. A quick look at Morningstar's list of natural-resources funds shows 77 funds available -- but only 33 of them have been around longer than five years. Screening these funds for a manager or management team that's been in place for at least those five years winnows the choices to only 19. Further filtering for funds that are still open to new investment, with expenses below the 1.4% average expense ratio, yields a list of 12. And of those, roughly seven have a solid enough performance track record to merit a closer look:
|
Fund |
Net Expense Ratio |
5-Year Return through June 2007 |
|---|---|---|
|
Vanguard Energy (VGENX) |
0.28% |
28.5% |
|
U.S. Global Investors Global Resources (PSPFX) |
1.03% |
38.5% |
|
T. Rowe Price New Era (PRNEX) |
0.66% |
23.3% |
|
Excelsior Energy & Natural Resources (UMESX) |
1.13% |
25.5% |
|
iShares DJ U.S. Energy ETF (NYSE:IYE) |
0.48% |
22.8% |
|
Energy SPDR (AMEX:XLE) |
0.24% |
23.3% |
|
Rydex Energy (RYEIX) |
1.34% |
22.5% |
All of these energy funds are heavy in big-name oil producers such as ExxonMobil (NYSE:XOM), Schlumberger (NYSE:SLB), and ConocoPhillips (NYSE:COP), among others. While the forecast for future oil demand may make these stocks compelling investments, their size and performance means they'll most likely be represented in regular old diversified large-cap mutual funds, too.
While the supersized recent returns from natural-resources funds may be awfully tempting, don't buy one unless you can truly justify why your portfolio needs such targeted exposure to commodities. The small universe of high-quality funds in this sector makes that justification even trickier. Just remember that such funds frequently encounter high volatility, which could give you a rocky ride. When you're dealing with commodities, that's only natural.
Further all-natural Foolishness:
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Fool contributor Amanda Kish lives in Rochester, N.Y., and does not own shares of any of the companies or funds mentioned herein. The Fool's disclosure policy likes digging for good investments.
