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Mutual Funds for High Oil Prices

NEW YORK (TheStreet) -- With oil prices climbing, you might expect that investors would be racing to buy funds that have big stakes in energy and commodities.

But in the past year, shareholders have followed unexpected patterns, investing in some energy-oriented funds and pulling out of others.

According to Morningstar, investors have put $6.1 billion into commodities broad basket mutual funds, which have 47% of their assets in energy.

At the same time, shareholders have pulled $600 million out of natural resources mutual funds, which have 44% of assets in energy.

Why are natural resources funds unloved? Part of the problem is that the resource funds invest in stocks of energy and commodity producers.

Portfolios hold big integrated oil companies such as Chevron (CVX) as well as gold miners such as Randgold Resources (GOLD).

These days many retail investors have soured on equities, pulling money out of most kinds of stock funds. Even though energy companies stand to generate huge profits if oil prices spike, fund shareholders are not interested.

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Many nervous shareholders prefer the broad basket commodities funds. Instead of holding stocks, the funds invest in futures and other derivatives that track benchmarks such as the S&P GSCI commodity index.

There is a clear case for owning a broad basket fund. If commodity prices skyrocket, the funds could climb and help diversify portfolios. But investors should not overlook natural resources funds.

Because the two kinds of funds don't always track each other, it can pay to hold both a natural resources fund and a broad basket portfolio.

Recently the performance records of the different categories have diverged.

During the past five years, natural resources funds have returned 4.1% annually, while broad basket funds have lost 1.3%.

Seeing that record, some investors might decide to only hold a fund that owns natural resources stocks. But keep in mind that natural resources funds tend to be volatile, soaring in bull markets and falling sharply in downturns.

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To appreciate how the records of the funds can differ, compare the performance of Prudential Jennison Natural Resources (PGNAX), one of the largest funds in its category, and Credit Suisse Commodity Return Strategy (CRSOX), a popular broad basket fund.
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