Tap resource gains
NEW YORK – Grumbling about gasoline prices has become as reflexive as complaining about the weather. But unlike the weather, investors in natural resources funds have discovered there is something they can do about rising prices.
For starters, they can profit from it – at times handsomely. Surging demand for everything from tin to copper to the oil used to make gas has helped vault natural resources funds to among the top-performing fund types. The funds finished the third quarter up an average 7.2 percent, giving them a whopping year-to-date return of 30.7 percent, according to fund tracker Lipper Inc.
While recent increases in oil have reflected concerns about relations between Turkey and Iraq, strong global economic growth and a falling dollar account for much of the longer-term gains, observers say. The story is the same for many of the other commodities in which natural resources funds invest.
“Global demand for raw materials has been increasing notably in China as well as other developing areas,” said Dan Raab, managing director at AIG Financial Products Corp. “You can’t just turn on the tap and produce more commodities – more base metals, more crude oil. It takes years to develop new infrastructure.”
Raab noted that a recent decline in the dollar has helped push up prices because commodities are traded in dollars. It now takes more dollars to acquire a single unit of a commodity, such as one barrel of oil. But beyond the dollar, development in places such as China, Brazil, Russia and India has placed huge demands on resources.
“It all stems from urbanization and industrialization in developing countries,” said James Vail, co-portfolio manager of the ING Global Natural Resources Fund. “What we’ve tried to do is continue to focus on commodities where the Chinese have to import it,” he said, naming iron ore, coking coal, and copper as well as nickel.
“Historically, natural resources cycles tend to last 10 to 15 years,” said Vail, noting that the latest upswing began to emerge after 2001-02.
But while market watchers might point to signs that demand will continue to increase over a longer period, short-term gyrations could prove unnerving.
After being up sharply last year, corn prices are off about 20 percent this year as farmers eyeing strong demand in the U.S. for corn-based ethanol made more room for the crop. But plots now devoted to corn in some cases came at the expense of wheat acreage. That has helped push the price of wheat up nearly 50 percent this year.
“It hasn’t been a steady gain in every commodity in every year,” Raab said.
For that reason, investors looking for diversification beyond stocks and bonds should consider how much they would want to be exposed to a volatile sector.
“Any sector play should be done with caution,” said Tom Roseen, senior research analyst at Lipper. “These are among the least efficient at preserving capital. Being selective is very important in this group.”