BOSTON (TheStreet) -- Joe Wickwire, manager of the Fidelity Select Gold (FSAGX) - Get Report and the Fidelity Global Commodity Stock (FFGCX) - Get Report funds, says investors looking to take advantage of the bull market in commodities should own shares of gold producers instead of gold.
During the past five years, the $3.2 billion Fidelity Select Gold fund has returned an average of 18% annually, better than 61% of its
rivals. The $293 million Global Commodity Stock Fund has climbed more than 35% since its inception last April.
Fund Manager Five Spot, where America's top mutual fund managers give their best stock picks in five fast and furious questions.
Are you a commodities bull or bear?
I think that the commodities asset class is in a secular bull market. From 1982 to 2000, we saw the greatest bull market for financial assets and a corresponding secular bear market for hard assets. Since the financial asset bull market ended in 2000 with the dot.com bust, we have been in a bull market for commodities. This back and forth between the different asset classes is quite consistent with history. But, while the financial asset bull market had an 18-year duration, we are only in the ninth year of absolute and relative outperformance for commodities. Long-term fundamentals indicate the commodities have further to go.
As the economic-growth leadership has shifted from developed to developing economies, I expect the needs-based economies of the emerging markets to drive demand for natural resources.
Exposure to the commodity asset class may provide portfolio diversification and the potential to offset the loss of global purchasing power that may occur with currency weakness and rising commodity prices.
What is your top industry pick?
My top industry pick are the gold producers. The three drivers for the gold space -- macroeconomic imbalances, geopolitical tensions and a favorable supply/demand profile - have been very supportive of a higher gold price over the last nine years.
The gold producers offer the potential operational and financial leverage in a rising gold price environment. Despite the strong performance that the asset class over the past nine years, when adjusted for inflation, gold is still well below its historic real record prices last seen in 1980. And despite all this, the gold asset class is still a very small part of the overall investment universe, smaller than 1% of all financial assets.
What is your least favorite industry pick?
Paper and pulp. They have performed well during this market recovery given strong cost-cutting measures. However, I feel their long-term prospects are less attractive than other commodity segments. Excess capacity and diminished demand in an increasingly digital/electronic world will likely leave the space with few near-term winners and significant headwinds.
Why do you prefer the commodity stocks over the commodities?
In a rising commodity price environment, the commodity stocks should outperform the commodities. The commodity producers provide operational and financial leverage to the commodities. Because many of the costs of producing the commodities are fixed, when their top line goes up, their earnings can go up even more. This is what we've seen over the last 10 years in a low inflation environment, as well as during the inflationary 1970s.
Specific to gold; as beautiful as a bar of gold is, it doesn't generate earnings, it doesn't pay dividends and it can't replicate itself. Gold producers have that potential. Over time, we believe that the equities will outperform the commodities themselves and it certainly has been true over the past nine years.
What approach do you take when choosing investments?
It is a combination of both a top-down and bottom-up approach. I and Fidelity's global team of fundamental analysts spend the majority of our time meeting with companies to try and determine which companies are best positioned to outperform. This analysis also includes our economic, technical and quantitative teams to make sure that we are properly assessing the macro-economic, industry and stock-specific factors that determine tomorrow's winners.
With our commitment and resources, combined with my experience and disciplined process, I believe we can provide strong results through active management in an asset class that is inefficient and still probably under-owned.
Reported by Gregg Greenberg in New York
Before joining TheStreet.com, Gregg Greenberg was a writer and segment producer for CNBC's Closing Bell. He previously worked at FleetBoston and Lehman Brothers in their Private Client Services divisions, covering high net-worth individuals and midsize hedge funds. Greenberg attended New York University's School of Business and Economic Reporting. He also has an M.B.A. from Cornell University's Johnson School of Business, and a B.A. in history from Amherst College.