Rallies in metal prices boost fund

Rise in oil demand also helps natural-resources portfolio
Posted by the Asbury Park Press on 04/16/06
BY PARRIS KELLERMANN
BLOOMBERG NEWS SERVICE

The Van Eck Global Hard Assets Fund is outperforming all but one natural-resources mutual fund by investing in oil drillers, zinc producers and gold miners.

The seven managers of the fund, including Shawn Reynolds and Samuel Halpert, placed about half of its $395 million in energy and 26 percent in metals. The remainder is in real estate, paper and agriculture.

"We're big believers in diversification," said Reynolds, 43, in an interview from his office at New York-based Van Eck Associates Corp.

Van Eck's fund rose 56 percent in the past 12 months. Only the $1.5 billion Jennison Natural Resources Fund, led by David Kiefer and Michael Del Balso, produced a higher return of the 20 natural-resources funds tracked by Bloomberg. The Jennison fund, run by Jennison Associates LLC in New York, gained 58 percent.

Overseas demand

The fund is benefiting from rallies in gold, oil and industrial metals such as aluminum and zinc. China's demand for raw materials used in machinery, appliances and cars lifted oil and zinc to records, while gold touched a 25-year high recently and aluminum is at an 18-year high.

In the past five years, the Van Eck fund climbed at an average annual rate of 26 percent, exceeding the 11 percent advance of the Goldman Sachs Commodity Total Return Index. The fund is volatile, rising as much as 49 percent in 2005 and falling as much as 32 percent in 1998. Investors probably will pour $140 billion into index-linked commodity funds this year, an increase of 38 percent, according to Barclays Capital.

"Some funds shift their assets heavily, but it's really hard to blunt the blow of volatility," said Sonya Morris, a fund analyst at research firm Morningstar Inc. in Chicago. "Negative returns in the double digits are not uncommon."

Morris said the natural-resources fund with the steadiest returns is the $4.1 billion T. Rowe Price New Era Fund, managed by Charles Ober in Baltimore. In 1998, when the Van Eck fund tumbled, New Era fell 10 percent.

Managers of the 12-year-old Van Eck fund can invest directly in commodities and mortgage-backed securities, and also engage in short selling by making bets that the price of an asset will lose value. The managers invest mainly in equities.

Golden future

Investments in precious metals accounted for 11 percent of the Van Eck fund's assets as of Feb. 28. Reynolds, who holds master's degrees in petroleum geology from the University of Texas in Austin and finance from Columbia Business School in New York, said the fund's managers remain bullish on gold, which this month reached $591.92 an ounce, the highest since 1981. Van Eck Associates opened the first U.S. gold fund in 1968.

The fund's investments during the past year included Randgold Resources Ltd., a Jersey, U.K.-based company that mines gold in the West African nation of Mali, and Vancouver-based Placer Dome Inc., which was acquired in March by Barrick Gold Corp. for $10.1 billion.

Van Eck started to reduce its energy holdings in September and shifted assets to shares of industrial metals companies. The allocation in metals stocks rose to 15 percent on Feb. 28 from 8.5 percent at the end of 2004.

Cia. Vale do Rio Doce, the world's largest iron-ore producer, was the fund's biggest metals investment. The fund cut its combined stake in forestry, paper and real-estate companies by more than half to about 5 percent.

Vale, as the Rio de Janeiro-based company is known, said March 24 that price increases are necessary because demand for iron ore can't be met by existing mines, mainly because of consumption in China.

"On a short-term basis, energy doesn't have a whole lot of upside potential, while at the same time, metals are looking good," said Halpert, 34, who followed his father into the commodities industry after graduating with a bachelor's degree in English from Harvard University in Cambridge, Mass.

Halpert and his co-managers also bought zinc contracts and shares of companies including Teck Cominco Ltd., the world's No. 1 producer of the metal used to coat steel to prevent corrosion.

Betting on energy

Energy remains the fund's biggest industry bet, even after the allocation in oil and gas holdings was lowered to 51 percent on Feb. 28 from 62 percent two months earlier. Reynolds said the fund cut its energy stake because an unseasonably warm January led to a decline in oil and gas prices. Crude-oil futures fell about 3 percent in the first two months of the year after jumping 40 percent in 2005. Oil rallied 7.5 percent last month.

Supply disruptions caused by hurricanes and geopolitical risks, most notably those stirred by Iran's uranium-enrichment program, may one day push oil prices above $80 a barrel, Reynolds said. Oil prices have been as low as $16.70 and as high as $70.85 during the past five years.

Oil-producing countries that pose risks such as Iran are "something you have to deal with constantly," Reynolds said. "It makes the job fascinating, but also difficult."