Naturally Speaking...

03/25/2005 12:00 am EST


Sheldon Jacobs

Author, Investing Without Wall Street, Five Essentials for Financial Freedom

"The history of commodities is one of booms and busts," notes Sheldon Jacobs, editor of The No-Load Fund Investor. He cautions that the rise will not last forever. However, for now, he is adding two natural resource funds to his "best buy" list to gain exposure to this area.

"The current bull market in commodities is approaching an advance of 100%, a gain historically associated with the end of a bull run. However, some argue that the supply and demand situation for commodities going forward will be different than in the past, due to ravenous demand from the US, India, and China. Our own estimate splits the different between historical parallels and a new paradigm. We believe that commodity prices will not rise indefinitely. However, commodities tend to perform well during periods of strong economic growth and inflation. They have a low correlation with stocks and bonds, which generally perform better when inflation is decreasing. Commodities also tend to perform well when the value of the US dollar is falling. While commodities are extraordinarily volatile on their own, they may provide some diversification benefit over the long run. Therefore, we are adding a small exposure to our Best Buy portfolio by adding two fund positions.

"One of them is T. Rowe Price New Era (PRNEX). Instead of investing in actual commodities, New Era invests in a diversified mix of natural resources companies in the US and abroad whose earnings and assets should benefit from accelerating inflation. The fund is considerably more conservative than the typical natural resources stock fund. Quality energy companies of various sorts (recently 56% of the fund) provide the backbone of the fund, which also includes plenty of industrial metals, forest products, chemicals, and agricultural-related companies. The expense ratio of the fund is only 0.69%, and it has experienced management. The fund has been much less risky than actual commodities. Though Price New Era has produced losses during steep downturns in commodity prices even when the broad stock market gained, those losses have been much more subdued than in the commodities themselves. While the Dow Jones AIG Commodity Index lost 19.5% in 2001, Price New Era lost only 4.4%. So far this year, the fund is up a strong 211.%. Over the past three years, it has gained more than 20% annually, with only moderate volatility.

"Our other new pick, Fidelity Canada (FICDX), is a foreign stock fund. However, we are recommending the fund for its exposure to natural resources instead of for international diversification. The fund has a beta well above 1.0 vs. commodities, with 64% of its monthly returns accounted for by this sensitivity. To a significant extent, the Canadian economy is dependent on natural resources; as of December 31, energy and materials stocks made up more than 35% combined of the S&P Toronto Stock Exchange composite, which is the recognized benchmark for the Canadian stock market. We note that the Canadian dollar is sensitive to commodities prices. When commodity prices rise, the Canadian dollar appreciates vs. the US dollar, increasing the returns of Canadian investments to US-based investors. Fidelity Canada lost 14.9% in 1998 and 9.6% in 2001, but has outpaced the S&P 500 in every year since 1999. The fund has gained 22.9% annually over the past three years. Fidelity Canada’s manager is young, but has been a relatively adept stock picker. He’s slightly ‘contrarian’ but looks for growth. The fund’s expense ratio is 1.15%, which we consider reasonable."

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