Precious metal funds gained 19% last year

Performance 2nd best of the fund groups

Dollars & Sense

January 13, 2002|By Christopher Davis | Christopher Davis,MORNINGSTAR.COM

Talk about a reversal of fortune.

The perennial fixture of the laggards list, the precious metals category, was 2001's second-best-performing fund group. The bear market took a heavy toll on most diversified equity offerings, but the typical precious metals fund gained nearly 20 percent for the year, 32 percentage points better than the S&P 500 index.

So what's behind the category's good fortune? Gold prices enjoyed a resurgence in early 2001, buoyed by a stagnant economy, a tumultuous stock market and fears that inflation would rise or the dollar tumble. The yellow metal began to falter throughout the summer, but it staged a rebound in August and September as economic news worsened and September's terrorist attacks sent the markets reeling.

Of course, should the economy recover this year - as many investors expect it will - precious metals funds will likely suffer. Gold is the traditional hiding place for those seeking refuge from a turbulent economy and rising prices, so if stocks surge and inflation remains at bay, these funds will be left eating dust.

Even so, nothing rules out the possibility of a bout with inflation or an economic crisis in the future. Either event would be a boon to gold prices, but history suggests they won't be enough to make precious metals funds compelling long-term investments. In fact, a $10,000 investment in the typical precious metals offering in December 1996 would have dwindled to just $5,163 five years later, despite several strong gold rallies during the period.

Nonetheless, investors keen on gold's future will find some appealing options in the precious metals group.

American Century Global Gold Inv

We didn't choose this offering simply because its eye-catching 33 percent gain in 2001 was among the category's best showings, although it certainly didn't hurt.

The fund has fared equally well during other gold rallies; it trounced the competition when gold prices spiked in September and October 1998, for instance.

It also boasts a seasoned management team, led by Bill Martin, who has been at the helm for nearly a decade. Further, the fund charges just 0.67 percent per year for its services, far below the lofty 2.07 percent category average.

Its long-term record isn't particularly impressive, but that owes to Martin's near-exclusive focus on gold, which languished for much of the 1990s. Expect this fund to lag behind its rivals during gold bear markets, but we think it is the best choice around for pure-gold exposure.

Vanguard Precious Metals

While this offering hasn't kept pace with its peers in 2001, we still think this is the best-diversified metal fund out there. Manager Graham French stashes about 30 percent of assets in non-gold plays, such as platinum and palladium, which have industrial applications.

Palladium, in particular, has been a liability in 2001, but it has helped buoy the offering over time. French devotes the rest of the portfolio to a mix of large producers, small exploratory companies and gold bullion. His tendency to invest in bullion has provided a fairly steady ride. That mix of stocks and bullion has helped the fund pound the competition over time, and its low expense ratio further heightens its appeal.

Oppenheimer Gold & Special Minerals

This fund's moderate strategy has turned it into a relative standout. Manager Shanquan Li uses an earnings-driven quantitative model, which favors large producers such as Barrick Gold.

That approach has helped amid a topsy-turvy gold market in recent years (large miners tend to have the lowest costs, so they are less susceptible to swings in gold prices than smaller players). And though Li invests about 15 percent to 20 percent of the fund's assets in non-gold plays, like platinum and palladium, the fund was ahead of the precious metals pack in 2001.

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