uh-oh. i wonder if this is the commodities equivalent of a bull on the cover of newsweek ...
Mutual Funds
Make a Pitch
For Commodities
By CHRISTOPHER OSTER
Staff Reporter of THE WALL STREET JOURNAL
There's gold in them thar funds. And copper and oil and lumber ...
So goes a current marketing pitch from the mutual-fund industry. With commodities prices soaring and Federal Reserve Chairman Alan Greenspan concerned about inflation, some fund companies are urging people to protect themselves against higher prices by putting money into mutual funds that specialize in commodities.
Nothing new in that for investors who can tolerate a lot of volatility. There are dozens of gold and natural-resources mutual funds that have been around for decades, most of which invest in stocks of gold-mining firms, oil producers and timber companies. Gold funds in particular have been favorites of investors who are alarmed about the economic future and see such funds as the next best thing to owning the precious metal itself.
But several mutual-fund companies say commodities these days aren't just for the sky-is-falling crowd, and that precious metals, oil and paper deserve a place in the portfolio of any investor who sees inflation ahead. Further, more fund providers are introducing portfolios that invest not in the stocks of commodity-related companies, but in the hard assets themselves through various financial instruments that track commodity prices.
Merrill Lynch & Co. and Mellon Financial Corp.'s Dreyfus Funds each have filed plans with the Securities and Exchange Commission in recent months to launch such funds. Two exchange-traded funds that will track the price of gold bullion also are in the works.
The new entrants will join two commodity-tracking funds currently available to investors. The $472 million Oppenheimer Real Asset Fund was launched in 1997 and has returned an average 18.1% a year during the past five years, a period during which the overall market has been virtually flat.
Pimco Funds, a unit of Germany's Allianz AG, launched its Pimco CommodityRealReturn Strategy Fund in November 2002 and the fund jumped 29.1% last year, slightly ahead of the S&P 500-stock index and the Dow Jones Industrial Average. In little more than a year, the fund has grown to more than $2.1 billion in assets.
Here is how the price-tracking commodity funds work: Rather than buying stocks of companies, or buying actual hard assets such as gold, the funds purchase futures, options and other financial instruments in a mix designed to mimic a broad commodities index. Since the outlay to buy the financial contracts is small, the rest of the funds' assets are invested in fixed-income securities, which essentially serve as collateral accounts for the highly volatile financial instruments. When the instruments lose or gain in value, the swings are tempered by the bond holdings.
The renewed interest in commodities funds is little surprise to some. "There's always a market out there for scare products, whether it's gold or defense stocks," says Don Cassidy, senior research analyst at Lipper Inc. in Denver. "There are folks out there that are hard-asset folks, and at the merest whiff of inflation, they're back after hard assets again."
Commodity-related funds have found buying assets directly poses numerous logistical problems, and buying individual stocks when trying to take advantage of rising commodities prices can be trickier than it looks. Some oil companies and gold-mining concerns hedge their exposure to commodities with the use of futures contracts, for example, making it difficult for investors to know the true impact commodity prices will have on those share prices.
"Every investor should have a 5% or 10% allocation to commodities," says Kevin Baum, manager of Oppenheimer Real Asset.
The gains of commodity funds can be significant. Three resource-company-focused funds run by U.S. Global Investors -- Global Resources Fund, Gold Shares Fund and World Precious Metals Fund -- were up 99.6%, 67.1% and 92.7%, respectively, last year.
But Frank Holmes, chief investment officer of U.S. Global Investors, which has about $1 billion under management in funds focused on natural resources, says the downside can be equally dramatic. U.S. Global Investors' Gold Shares and World Precious Metals funds were down 57.4% and 41.1% in 1997, and Global Resources was down 38.5% in 1998.
The funds that track commodity indexes can be at least as volatile. Oppenheimer Real Asset, the first of the group, has had big moves both up and down since its launch in 1997. It has gained as much as 44.4% in a single year and lost as much as 44.9% -- and its single year loss or gain has never been smaller than 22%.
And not all of the funds are straightforward bets on commodities indexes. While Mr. Baum at Oppenheimer says he keeps his cash account invested in high-quality, short-term, fixed-income securities to minimize the fund's exposure to interest-rate swings, the Pimco fund invests its cash in TIPS, or Treasury Inflation Protected Securities. But putting money into bonds carries its own risks as rising interest rates push bond prices lower, including those of TIPS, since bond prices move in the opposite direction of yields.
Two exchange-traded funds linked to the price of gold, the first of their type, currently are awaiting approval from the SEC. ETFs are similar to mutual funds but their shares trade throughout the day on exchanges like listed securities.
Both planned offerings will attempt to give investors a means of betting on gold prices without actually going out and buying bullion.
The World Gold Council, an association of gold-mining companies, filed to launch the Equity Gold Trust, and Barclays Global Investors last month filed to launch its iShares Comex Gold Trust. Equity Gold Trust will set its net asset value based on prices in the London market and the iShares fund will link its net asset value to the Comex gold-futures contracts.
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SPLIT DECISION: Research firm Morningstar Inc. said investors should consider selling Pimco stock funds run by PEA Capital LLC following improper trading allegations, but noted that its recommendation didn't apply to Pimco bond funds run by Pacific Investment Management Co.
New Jersey Attorney General Peter Harvey last month charged several Pimco units with civil fraud for allegedly allowing certain investors to rapidly trade in and out of its funds, contrary to stated policies regarding such trading. The Pimco units said the trading didn't violate the prospectus language for their funds.
Morningstar analyst Eric Jacobson said he found the charges and evidence against PEA Capital to be "extremely troublesome," resulting in the recommendation that investors consider selling the funds after reviewing their tax situation. But Mr. Jacobson said Morningstar made no change to its opinion on funds run by Pimco's California-based fixed-income operation because the case presented by New Jersey "appears less compelling" than with the stock funds.
A Pimco spokesman said the firm agreed with some of Morningstar's assessment regarding its bond operations, but it disagreed with what was said about PEA Capital. He declined to elaborate.
