July 14, 2007 in Business

Resources are hot

Tim Paradis Associated Press
 

NEW YORK – As consumers turn to air conditioners for relief from high temperatures and set off on summer road trips, it might appear that America’s appetite for natural resources hasn’t ebbed although oil prices have generally been quite high during the past year.

Wall Street, with its own hunger pangs for profits, seems to agree. While some investors might be concerned that rising energy prices could fan inflation and hurt consumer spending, many also apparently see opportunity in natural resources mutual funds.

Many of the funds, which often invest in energy stocks as well as materials suppliers like timber companies and steel producers, have risen sharply in recent years amid strong global demand for an array of resources.

In the quarter that ended June 30, funds that invest in natural resources stocks showed an average return of 14.7 percent, according to fund tracker Lipper Inc. The gains pushed the year-to-date returns for natural resources funds to 21.6 percent; the one-year return as of the end of the second quarter was 22.2 percent. And the strong demand is likely to continue, according to Jim Vail, manager at the ING Global Natural Resources Fund. He credits the rapid industrialization and urban expansion in places like China and India with helping drive demand and with reducing the role the U.S. economy plays in determining prices for natural resources.

“There is a lot of skepticism as to the length of the cycle and the strength of it and as a result people are just betting that commodity prices are going to come down and we just don’t see that.”

He contends that the economic transformations taking place in many developing countries could give investors in natural resources funds greater than normal insight into how long demand might remain high.

High energy and materials prices have helped the fund as has industry consolidation. Freeport-McMoRan Copper & Gold Inc.’s acquisition earlier this year of rival Phelps Dodge Corp. have helped the ING fund show a 23 percent return so far this year. Its three-year annualized return is 28.9 percent and its five-year annualized return is 22.2 percent.

And the companies themselves are benefiting from higher commodity prices. In the case of Freeport, the company has enjoyed copper prices that remain at three times the levels seen in the 1990s.

So while oil prices hovering above $70 per barrel might stir concerns about the direction of the overall economy, companies in the energy sector and natural resources funds can reap big gains.

But of course not all natural resources investments have done as well as the energy sector.

Regardless of how the funds have done this year, investors should remember that the big gains shown by the funds can be fleeting, Roseen said. “People don’t buy this trying to sleep well at night,” he said, of a natural resource fund. “Natural resources funds are the cat’s meow today and the next day they’re moving down below everybody else.”

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