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Surge in 'Hedge' Investments Puzzles Pros

April 05, 1993|RUSS WILES | RUSS WILES, a financial writer for the Arizona Republic, specializes in mutual funds.

All of a sudden, inflation-sensitive mutual funds are acting like they own the road.

Portfolios of real estate, gold and natural-resources stocks were among the top six of 23 equity categories when the checkered flag came down on the first quarter last week.

Gold-oriented funds finished in the winner's circle, with a three-month average gain of 21.7%, according to Lipper Analytical Services.

Do such results suggest that inflation is roaring back, or that these three long-beleaguered fund groups are the place to be?

No such consensus has developed among investment professionals, many of whom believe that the economy remains stuck in the slow lane of modest growth and low inflation. "I put my money down on a slowdown in inflation from 3% last year to 2.5% to 2.75% this year," said David C. Munro, chief U.S. economist for High Frequency Economics in New York.

Although consumer and wholesale prices jumped in January and February, "the pace of the business expansion offers no indication of a boom that would sustain accelerating inflation," he said.

Donald H. Straszheim, chief economist for Merrill Lynch, says he advises investors not to worry about inflation. He added that recent commodity price increases have been limited to lumber. And Susan McDermott, a senior consultant at Stratford Advisory Group in Chicago, says her firm expects to see a low, controlled inflation rate in the foreseeable future. "We don't anticipate needing to hold assets that do well when inflation moves higher," she said.

The fact that commodities and tangible assets are at least showing some pep of late is good news to speculators who like to dabble in sector funds. It's also welcomed by more conservative investors who have taken a modest stake in a real estate, gold or natural-resources fund to diversify and round out their portfolios.

The interesting--yet also risky--thing about the mutual funds in these three asset groups is that they don't move in sync with the broad U.S. market. Natural-resources portfolios move only about 40% in line with the Standard & Poor's 500, according to Morningstar Inc. of Chicago. On average, real estate funds move a bit more in sync, but the gold products have virtually no correlation.

Though they are often lumped together as inflation hedges, the three types of funds actually are more complex than that. Here's a sketch of what they hold and how they've performed:

* Real estate: Funds in this category seek a combination of income and appreciation, primarily by holding real estate investment trusts.

REITs are unique creatures that pool investor money to purchase individual properties or make loans, and pass most of the profit back to shareholders. REITs trade on stock exchanges, are pooled securities like mutual funds, yet offer yields closer to what bonds are paying.

In general, REITs can choose from an assortment of property types--including apartment buildings, office complexes, shopping centers and health care facilities.

Real estate mutual funds often complement their REIT holdings by purchasing the common stock of companies with real estate ties--from developers and forestry companies to mortgage lenders and hotels.

Only six mutual funds, with a combined $750 million in assets, are focused on real estate. Fidelity's Real Estate portfolio (800-544-8888, no load) is by far the biggest, with assets of $475 million. It also has been the best and most consistent performer in this young field.

Cohen & Steers Realty Shares (800-437-9912), the second-largest and newest fund in the group, was the sector's 1992 leader with a return of 21%. This no-load product requires a $100,000 investment unless purchased through Charles Schwab, where the minimum is $2,000.

* Natural resources: These portfolios invest in commodity-oriented common stocks. Oil companies top the list of holdings, which also include natural gas, gold mining and utilities.

Energy portfolios have a long history of being laggards. They fell nearly 3% on average from 1990 through 1992--three years when the average equity fund rose 28%, according to Lipper. In fact, they beat the average stock portfolio in just one of the last 10 years.

According to Morningstar, the best funds in this weak group include New Alternatives (5.66% load, 516-466-0808), PaineWebber Global Energy (5% maximum load, 800-647-1568), T. Rowe Price New Era (no load, 800-638-5660) and Vanguard Specialized Energy (no load, 800-662-7447).

* Gold: Funds in this sector invest in gold-producing companies, with a handful of platinum and silver mining concerns thrown in. For various reasons, the funds and the stocks they hold fluctuate more than the prices of the metals.

For the most part, those fluctuations have been in the wrong direction.

As disappointing as the energy group has been, gold portfolios have fared even worse over the long haul. Gold funds have lost money in six of the last 10 calendar years, including the most recent three.

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