Mining Funds Go Pink

Investors are perennially warned against buying stocks listed on the so-called Pink Sheets, often referred to as the "Wild West" of markets. Some observers may therefore be surprised to learn that some top-rated mining and metals funds have holdings of stocks in companies that are not listed in the U.S. other than on the Pink Sheets.

The (VGPMX) Vanguard Precious Metals and Mining fund, the only specialty precious-metals fund to receive five stars from Morningstar, provides an eye-popping example. Its top-three holdings are Pink Sheet stocks, Lonmin, Anglo Platinum and Impala Platinum, accounting for 9%, 7% and 6%, respectively, of the overall portfolio as of June 30, the latest data available.

It's not as if Vanguard's alone, As of Sept. 30, (EKWAX) Evergreen Precious Metals holds shares of Pink Sheet names, notably Newcrest Mining (6.4% of its portfolio), Lonmin (2.1%) and Impala Platinum (2%). Other well-known funds doing similarly include the (FKRCX) Franklin Gold and Precious-Metals fund and (FSAGX) Fidelity Select Gold fund.

So what gives? Are these funds holding toxic waste? Or are professional money managers exempt from such advice?

The explanation appears to be a function of a geographically diverse industry. When picking mining stocks, confining the search to the U.S. just doesn't cut it. That's because the universe of stocks in terms of size and number is greater abroad.

"Newmont Mining(NEM) is by far the best known U.S. company, and it is a great company. But most of the great companies in the space are international companies," says Joe Wickwire, portfolio manager for Evergreen's precious-metals fund. "We are looking to put together the best possible diversified precious-metals portfolio we can," and that includes going global.