Today in the New York Times -
Buying Into the Company, Not the Commodity
IT’S been quite a bull market for more than seven years — not in stocks, but in commodities. Indexes tracking their prices have increased by well over 100 percent during that time, while the Standard & Poor’s 500-stock index is now just a bit above where it started that stretch.
Matthew Staver/Bloomberg News
A Conoco station in Englewood, Colo. ConocoPhillips is among stocks that a fund manager suggests for investors interested in starting a natural resources portfolio.
Still, investing in commodities is not an easy sell. Trading corn, copper, lumber, natural gas or heating oil futures requires a Zen-like tolerance for volatility and loads of ready cash to meet the potential margin calls that loom in the background.
Exchange-traded funds based on commodity indexes can offer a less bumpy, more familiar ride. Yet while such funds became more popular with investors last year, they remain a tiny sliver of investors’ total assets, even those handled by professional money managers who could be expected to have a broad view of diversification.
Heather Shemilt, a managing director at Goldman Sachs who is head of its commodity investor business, says she thinks that a modest 3 to 7 percent invested in commodities would be about right for an institutional investor’s portfolio. Just the same, many clients own far less than that or none at all.
But there is an easy way to get a shot at commodity-like returns, without investing directly in commodities or their indexes. Investors can buy shares of the natural resource companies that produce commodities.
To be sure, the prices of these stocks do not necessarily move in lock step with those of commodities; many other factors can also influence share prices. Nor are investors in these stocks free from worry about losing a large chunk of capital quickly. Their risks may be spread out, but there are plenty of them.
To many investors, though, the similarities may ultimately matter more than the differences. Demand for commodities, particularly demand from China, is widely regarded as the reason for higher commodity prices and higher sales and earnings for natural resources companies.
Many experts, like James B. Rogers Jr., co-founder of the Quantum Fund and developer of the Rogers International Commodity Index, see commodity prices and natural resources stocks continuing a bullish stampede; despite some recent weakness, they’ve been running together for years.
Consider a comparison between the Goldman Sachs Commodity Index, which tracks the market for energy, metals and agricultural commodities through futures contracts, and the Goldman Sachs Natural Resources Index, which follows shares of companies that produce commodities. Over the last five years, the natural resources index rose 18 percent a year, on average, versus around 15 percent for the commodity index.
Companies in the natural resources index also had the edge in how they produced their returns. Though the gains of that index have slowed recently, it has not experienced anything like the nerve-fraying 30 percent plunge in the commodity index that started last summer, prompted by declining oil prices, and ended earlier this year.
Investors have many familiar choices for playing the sector’s stocks — far more than they do when they hold commodities directly. As is the case in real estate, electronics and other specialties, they can gain exposure to natural resources producers through dozens of specialized mutual funds.
The average fund in the sector returned 23 percent, annualized, over the three years through Thursday, according to Morningstar.
“This is not a well-understood sector,” explains Fred Sturm, portfolio manager of the Ivy Global Natural Resources fund, who has two decades of experience in that sector. “So a fund manager has the opportunity to add value.”
Investors still need to pick their funds with care. Many natural resources funds are highly concentrated in energy stocks, which tend to be very volatile.
Investors may also take a more hands-on approach. They can try holding one fund that is heavily invested in energy and another in metals, or they can assemble their own natural resources stock portfolio.
David Kiefer, managing director of the Jennison Natural Resources fund, says he thinks that a committed investor could do it with 7 to 15 stocks. One of the most likely candidates for any natural resources portfolio might be Transocean.
It is one of Jennison’s largest holdings, as it is for several other funds, like Van Eck Global Hard Assets and BlackRock Global Resources — among the best- performing mutual funds over the past five years. Transocean’s ticker symbol, RIG, goes to the heart of its popularity. It is a huge offshore drilling services company, and, says Derek van Eck, manager of the fund that bears his name, “everybody is looking for oil in the water.” Similarly, he recommends Southwestern Energy, which, he says, is “a play on growth in exploring for oil, natural gas and shale because it has attractive domestic leases.” Companhia Vale do Rio Doce, a miner of nickel and other metals, based in Rio de Janeiro, which acquired Inco last year, is his top non-energy stock.
Mr. Sturm of Ivy Global said he thought a natural resources portfolio should account for about 10 percent of investors’ stock holdings, and he suggested that those interested in starting such a portfolio include the oil giant ConocoPhillips and Barrick Gold, the mining stock. But he cautioned that investors in natural resources stocks could be in for a rough ride. “The sector has an inherent volatility,” he said, “so investors need to have a long-term perspective.”
nytimes.com |
