Morningstar May Have Bid a Premature Farewell to Its Natural Resources Fund

The category is doing quite well, and inflation may not be as dead as the fund-tracker thinks.
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I read with interest the other day about how


, the big fund-tracker in Chicago, had reshuffled its 401(k) plan. How can you not pay attention when the outfit that the whole world listens to about mutual funds goes mutual fund shopping itself?

Well, which funds Morningstar added to its plan, which ones it tossed out and which ones it kept may have only limited applicability to other investors. Nonetheless, the folks at Morningstar, not immodestly, suggest that with 15 years of experience in analyzing investments, they can tell the world a thing or two about picking funds and building portfolios.

But one decision Morningstar made threw me -- at least its timing did. Morningstar chucked its lone natural resources fund, the

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T. Rowe Price New Era fund. The rationale: Commodity stocks in recent years haven't served their purpose as inflation hedges, primarily because they haven't been needed. "Inflation? What's that?" quipped Morningstar in a

story reporting its 401(k) plan changes.

Certainly no threat, at least according to last week's reports of flat-to-down prices at the consumer and wholesale levels.

And yet, as Jim Bianco, head of

Bianco Research

in Chicago, points out, commodities are turning in some of the best returns of any investment sector this year. You might not have noticed if your commodity research stops at the widely quoted

Bridge/CRB Index

. That benchmark has posted a loss for the year, dragged down by a heavy weighting in agricultural products, which are also what's keeping the

producer price index

in check. But take a look at some indices with heavier weightings in base metals (prices for aluminum, copper, zinc and the like are up 10% to 15% from recent lows) and energy (oil is up 90%; natural gas, 30% to 35%).

It's little wonder that natural resource mutual funds were some of the second quarter's biggest winners, logging a 19.71% return on average, trouncing the

S&P 500's

7.05% and the average general equity fund's 7.08%. At the top of the list is

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Robertson Stephens Global Natural Resources fund, managed by Andrew Pilara, up 28.04%, according to fund-tracker


. T. Rowe Price New Era, in case you're wondering, ranked 52nd of 60, with a still-not-shabby 15.0% gain. Among the other top performers:

The natural resources rebound is a classic supply and demand story. The economic collapse in Asia and Latin America took worldwide industrial production to almost zero in 1998. Now demand for goods is back, but supplies of raw materials are at recession lows, with price upticks accelerated by politics and even the weather. The

Organization of Petroleum Exporting Countries

agreed on production cuts last spring that seem to be sticking, for example, and a couple of warm winters have slowed natural-gas drilling and production. Continued OPEC resolve and a cold winter could produce shortages in the next year or two, fund managers and analysts say.

Longer term, Robertson Stephens manager Pilara sees a change in corporate sentiment that's been a long time coming. Managements -- particularly among paper and forest-products companies and oil and gas concerns -- have shifted their focus from increasing volume at all costs to enhancing profitability. "These companies are creating shareholder value," says Pilara.

Finally, investors, including the pre-retirees at Morningstar, could be lulled into a false sense of inflation security by the distorted lows of 1998. "With the world economy now making the transition from crisis to recovery, some classic warning signs on the inflation front are falling into place," wrote

Morgan Stanley Dean Witter

economist Stephen Roach in a recent report. We could see the

consumer price index

a full point higher by the end of 2000, putting an end to deflationary market themes. "Investors,'' said Roach, "remain largely in denial over such a possibility."

So, while I don't want to second-guess the gurus at Morningstar, I can't help but wonder: Is it really the right time to give the heave-ho to natural resources?

Anne Kates Smith is a senior editor at U.S. News & World Report in Washington. At time of publication, Smith had no positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks or funds.