Investors who view the stock market rally with as much caution as pleasure, and see bonds vulnerable to rising interest rates, might want to look at commodities funds as a way to diversify their portfolios.

But they are not for everyone.

Refco's recent launch of its S&P Managed Futures Index Fund is a push to get a broader range of investors into strategies that are typically limited to the very rich, and maybe grab a bit of Pimco Funds' market share in the process.

The managed futures fund, which Refco hopes will pull in $300 million in its initial sales push, puts money into accounts run by the 14 commodity trading advisers who make up the S&P Managed Futures Index. For a $10,000 minimum investment -- or $3,000 for retirement accounts -- Refco is giving access to commodity powerhouses such as John W. Henry & Co., Hyman Beck & Co. and Campbell Financial's metals and energy portfolio. To invest in these commodity hedge funds, which buy contracts on the future prices of commodities such as metals, oil or soybeans, investors normally need to pony up a minimum of $1 million, or even $5 million depending on the fund structure.

At first glance, the Refco fund is a promising setup, since the fund is structured for maximum liquidity and the index is up a romping 10.29% for the year to date. But commodities are volatile. Between 1998 and 2002, the index notched 25 months of net losses in a five-year period. Many investors may not be able to live with that seesaw effect, even though the index has had positive annual returns since 1998. The index was up only 5.7% in 2001, but posted a robust 20% in 2002. In comparison, the S&P 500 was down 13.04 in 2001 and 23.37% in 2002, before rebounding with a 26.38% gain in 2003. (The S&P Managed futures index was up 8.89% in 2003.)

"What would the goal of the investor going into this fund be?" asks Ron Roge, a Bohemia, N.Y., financial planner. He says most investors don't know enough about commodities to wade in, even if this asset class is demonstrably uncorrelated to stocks and bonds.

Commodities' historical disconnect from stocks and fixed income investments is the very reason some financial planners think they're a good idea, at least for some investors.

"I think for an investor with a larger portfolio, this could be a great addition," says Ted Toal, an Annapolis, Md., financial planner. "Historically, commodities and managed futures have had a negative correlation to stocks and fixed income."

He has put clients into the Pimco Commodity Real Return Fund ( PCRIX), in its class D shares.

The Pimco fund, perhaps the best known entry point for average investors who want a piece of the commodities market, invests in a basket of commodity futures and puts the bulk of its money in Treasury Inflation Protected Securities, or TIPS. The fund is up 6.73% for the year to date, according to Morningstar data, easily outperforming the major stock indices.

But Toal and other advisors are also aware that fees now weigh heavily on investor's decisions, and the trading costs of a commodities fund will be high. At 4.95% a year, Refco's index fund is pricier than most mutual funds, to be sure.

The inclusive fee covers licensing costs for the S&P index, maintenance of the accounts linked to the funds and a 2% broker's cost for servicing and sales. A separate share class that charges 2.95% -- but doesn't include the broker's costs -- is also available.

Brian Clarke, head of sales for Refco Alternative Investments in the Americas, says the fund aims for annual returns of 13.5% -- less the fees, that's a targeted return of 8.5%.

While that's well behind the current performance of equity funds linked to major indices, it never hurts to diversify, says Loyd Stegent, a Houston financial planner.

Should interest rates rise and the market rally falter, commodities "would be the only buffer in your portfolio," he says. Current returns in commodities don't hurt either, he adds.

"The demand for commodities from markets like China and India and other emerging markets have really started boosting prices, and there is no sign of that slowing down," he says.

Before Pimco offered its broad-based commodity fund, which is linked to the Dow Jones Commodity Index, Stegent favored using oil and gas funds, such as those run by Invesco and State Street.

"Studies show that over 30 years having this exposure will decrease the level of volatility in your portfolio as well as increase the level of return," he says.

But how much exposure is enough? How much is too much?

Toal, in Maryland, suggests a cautious approach -- no more than 5% of a $250,000 portfolio should be in commodities, and even investors with a much higher tolerance for risk shouldn't go above 8%.

Stegent takes a more liberal approach, but qualifies that by saying an investor must be open to much greater risk with an allocation of 10% to 15%. The reward, he says, may be worth it.

"Is it better to go with an index fund, or a manager that has a proven record of generating alpha," or market risk adjusted outperforming returns, he asks. "If you've got a hedge fund manager who can do better than that, it certainly is worth the added fee."

Roge, in New York, disagrees with the benefits of commodity investing. "You're buying contracts that are betting on the direction of prices," he says. "It's got to be someone who has a propensity to gamble who would be attracted by this."

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