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Natural Resource Funds Gain New Respect


Natural resources mutual funds, a losing sector in recent years and having lost a net $317 million in assets last year, are some of this year's strongest performing funds. They are being used by at least one fund company to drive sales.

Invesco of Denver earlier this year added its Energy Fund to a company program that aggressively markets 10 to 12 of the firm's strong-performing funds, said Tom Pellowe, a vice president and national account manager with the firm. The list of funds known as "Focus Funds," are used by the company to generate sales and gain market share, he said.

"The list doesn't change too often, but with what's been going on in energy this year, we think it's a benefit to our advisor clients and also our shareholders to keep them up to date on what's going on in the fund and some of the advantages of that portfolio," he said. The firm has been distributing information and marketing materials about the fund to the firm's 40 wholesalers.

It appears Invesco's strategy is working. Flows into the Energy Fund for this year through August were $186.8 million, up nearly five times from the $40.3 million in flows for the same period last year, according to Financial Research Corporation of Boston.

Flows for the sector overall are impressive, but not as impressive as for Invesco's fund. Natural resource funds attracted $339.3 million in assets through August. The funds attracted only $195.5 million for the same period the year before, according to FRC data.

But most of those flows can be attributed to strong performance, said Whitney Dow, an analyst with FRC.

"With a lot of these sector funds, if there is some sort of catalyst a lot of people will move into these funds," he said. The catalyst for natural resource funds has been surging oil prices that have been boosted by events in the Middle East, he said.

Natural resource funds, as a sector, have historically been losers. But the sector's numbers over the past year have enabled some investors to see the brighter side of higher fuel prices. As of Oct. 17, the sector has posted a 23.61 percent return, while the S&P 500 has returned 4.11 percent, according to Wiesenberger of Rockville, Md., a division of Thomson Financial, the publisher of this newsletter.

Still, Invesco has seized on the opportunity to market the fund, said Rich Carney, a product manager with the firm.

"We've built out a significant number of marketing communication pieces for this fund including an interactive video on our site and we've sent out mailings to our shareholders," he said. "We've done a lot to get the word on the fund out there."

The marketing push is designed to take advantage of the relatively small number of players in the natural resources sector, Pellowe said.

"It's a fund where we have a distinct advantage," he said. "The natural resource category is one that only has about $6.5 billion and we have nearly a half billion dollar fund and a lot of the major fund companies don't have a dedicated natural resource product, so it's a way that we can distinguish ourselves."

Oppenheimer Funds' Real Assets Fund has had a surge in performance, along with the rest of the sector. The fund is based on bonds issued by companies in the natural resources industries. The four different share classes for the fund have had an average return of 41.11 percent year to date, according to Morningstar of Chicago.

But unlike Invesco, Oppenheimer of New York is not increasing its marketing efforts behind the fund in order to take advantage of the fund's strong performance.

"We are following what we've always done," said Greg Stitt, a spokesperson for the company. "There hasn't been any blanket push for that fund or those types of funds." Flows into the Real Asset Fund through August were $5.8 million. For the same period last year flows were $48.2 million, according to FRC data.

Oppenheimer's lack of marketing is typical of firms offering natural resource funds, said Michael Gaul, an analyst with Morningstar. Before marketing funds that track a sector that is normally volatile and a favorite of market timers, funds are inclined to wait to see if a rally is sustained, he said. Even with recent strong performance, the average natural resource fund lost 1.5 percent in the last three years, he said. Moreover, the funds are a specialty product that are not a good match for the average investor, he said. Most investors use natural resource funds to add diversity to their holdings, he said.

Still, there is evidence that firms are increasing their stakes in the sector. Fidelity Investments of Boston, the Vanguard Group of Malvern, Pa. and Merrill Lynch Asset Management of New York have all taken greater positions in oil companies, according to data on Lionshares.com, a website that tracks the top investors in public companies. Vanguard for instance, is the seventh largest shareholder in Phillips Petroleum and purchased an additional 10,618 shares of Phillips last month.

Also, at least one fund is seeking permission to increase its exposure to the natural resource category. The Oppenheimer Strategic Income Fund, a multi-sector bond fund, filed a preliminary proxy earlier this month with the SEC seeking to allow the fund to invest in oil, gas and other mineral exploration and development programs. The fund's exposure to the sector, until recently, had been limited by state law. The fund is now seeking shareholder permission to lift those limits because the statutory constraints have been removed.