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.
Both funds suffered in 2008, when the economy sank into recession and commodity prices collapsed. For the year, the Prudential natural resources fund lost 52.9%, while the Credit Suisse broad basket portfolio dropped 35.5%. When commodity prices came roaring back in 2009, Prudential gained 73.2%, and Credit Suisse returned 20.1%. Helped by its bull market showing, Prudential returned 6.8% annually during the past five years, while Credit Suisse lost 1.5%. Natural resources stocks are particularly volatile because they are leveraged to commodity prices. Say it costs a company $80 to produce a barrel of oil that can be sold for $100. Now the market price rises to $120. That would cause the oil company's profits to climb by 100%, and the stock might skyrocket. 10 Consumer Stocks for the Stay-at-Home Investor But a fund that holds oil futures may achieve only a 20% gain because it is not leveraged to commodity prices. In a downturn, the reverse process occurs, and the stock could suffer big losses, while the futures fund would suffer a limited decline. Over the long term, commodity prices rise at about the rate of overall inflation, and broad-based commodity funds tend to match that figure. Because the resource stocks are leveraged, they can produce returns that are in excess of inflation, says Kevin McDevitt, a Morningstar analyst who argues that investors should consider natural resources funds. "Ultimately investing is about more than just matching the inflation rate," he says. "You want to beat inflation, and you can do that by investing in commodity stocks." For a solid natural resources fund, consider BlackRock Natural Resources ( MDGRX). During the past 10 years, the fund returned 12.3% annually, outdoing 65% of peers. The BlackRock fund typically has two-thirds of assets in energy. But lately portfolio manager Robert Shearer has raised the energy allocation to 88% of assets. "There is very little spare capacity in the world," says Shearer. "If there is a disruption in Venezuela or the Middle East, there could be a supply shortage." Shearer likes companies with sound balance sheets that are low-cost producers. He favors companies that seem poised to increase their production. One holding is Occidental Petroleum ( OXY). Shearer says that the company can increase its production at a single-digit pace. He also likes National Oilwell Varco ( NOV), which supplies rigs to drillers. The company is enjoying growing demand and stronger prices as offshore drilling increases.