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Mutual Fund Commentary

The S&P 500 scored gains of just 1.3% in first-quarter 2014. In comparison, the Thomson Reuters/Core Commodity CRB Index ended the first quarter with gains of 8.7%. This marked the 19-commodity index’ best performance since Sep 2012, as commodities turned out to be among the best investment options in the quarter. Commodities were reported to have secured the best gains among all asset classes since 2012.

The gains have come through a period when Chinese economic data have mostly been dismal, the Federal Reserve kept alive the trend of reducing its bond buyback program and the Russia-Ukraine crisis added to the volatility.  (Read: Russia Mutual Funds to Watch on Ukraine Crisis)

What Drives Commodities

It is important to note that macroeconomic events alone are not a guide to the direction the commodities will follow. The demand-supply equation plays vital role for commodity prices. For instance, coffee hit a two-year high driven by the extreme dry weather in world’s largest coffee producer – Brazil. The drought conditions have damaged the crops and the next year harvesting is feared to be light. Meanwhile, ethanol jumped to a 32-month high. This increase was mostly steered by the blockage along the rail lines in the U.S., which in turn was a result of the bitter winter season. Moreover, Nickel recorded its best performance since 2010.

On the other hand, copper had the worst performance. Copper future prices dropped about 10%; largely due to the dismal Chinese economic data. Metal is often taken to be an indicator of Chinese economy. While the bitter winter season had actually helped ethanol move up, it proved to be a disruption for lumber. Lumber demand dropped owing to the winter season and less-than-expected housing reports.

Commodity Fund Investing

The truth remains – commodities are among the best tools for hedging. Be it the geopolitical or economic events, global crises are always unanticipated. The Crimea impasse for example was not expected even when the year began. Thus, investors need to earn from exposure to the unexpected through a hedging action.

Trading in commodity mutual funds means placing bets in a safer way. While it is difficult and risky for retail investors to directly trade in commodities, they invest through mutual funds that park money in commodities or in commodity companies. The advantage here is that share price of the commodity companies are not solely driven by commodity prices. Macroeconomic factors along with the company fundamentals too play a role. For example, while the prices of gold may drop, the gold mining companies’ stocks may still move up backed by macroeconomic issues or positive company events. Fund managers take care of the investment strategies, so the risk is less for an investor.

The Outlook
Citigroup had claimed in Apr 2013 that the decade-long run of commodity gains is over. They had rung the ‘death bells’. However, at least the first quarter of this year has proved to be different for commodities. Citigroup recently noted that there are chances alive for “seasonality and cyclical turns in the asset market”.

Moving forward, commodity trading executives at the FT Commodities Global Summit in Lausanne sounded “cautiously optimistic” on the global economy. “We see the global economy accelerating in 2014 and 2015, driven mostly by the developed economies,” said Archer Daniels Midland’s chief operating officer Juan Luciano.

The Financial Times article also noted vice chairman of the US agricultural trading house Cargill, Paul Conway, speaking of “still living on a knife-edge”. He added: “With the increase in GDP, increase in consumption, also driven by meat, we need a good planting season, a good growing season and a good harvest season in the northern hemisphere and then a repeat in the southern hemisphere”. Meanwhile, Goldman Sachs co-head of global natural resources, Brett Olsher, is optimistic about the copper and aluminum prices moving higher significantly.

Funds to Buy

It is not always easy for individual investors to decide on which mutual funds to buy. It’s a good idea to focus on commodity mutual funds that have a healthy year-to-date return. Then one should zero-in on funds that sport a Zacks Mutual Fund Rank #1 or #2. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but the likely future success of the fund.

Here are the 5 commodity mutual funds to consider now:

Gabelli Gold A (GLDAX - MF report) invests a lion’s share in foreign and domestic company that are involved in gold-related operations and gold bullion. The fund prioritizes investing in undervalued stocks that have the potential for growth. Much of the fund’s assets are invested in foreign companies that include developed and emerging markets.
Top holdings include Randgold Resources Ltd ADR, Franco-Nevada Corporation, Fresnillo PLC and Goldcorp, Inc.

The fund has returned 20.60% year to date and current carries Zacks Rank #2 (Buy).

US Global Investors World Precious Minerals (UNWPX - MF report) seeks growth of capital in the long run and protection from monetary instability and inflation. A lion’s share of its assets is invested in companies that are primarily involved in exploring, mining and processing of precious minerals. They may include gold, silver, platinum group, palladium and diamonds. It prioritizes global intermediate exploration companies.

Top holdings include Virginia Mines, Inc, Klondex Mines, Ltd, Gran Colombia Gold 5% and MAG Silver Corporation.
The fund has returned 16.52% year to date and current carries Zacks Rank #2 (Buy).

Van Eck International Investors Gold A (INIVX - MF report) invests primarily in company engaged in gold-related activities or in instruments whose value is derived from gold, gold coins and bullion. The fund also invests 25% of its assets in the gold mining industry.

Top holdings include Randgold Resources Ltd ADR, Osisko Mining Corporation, New Gold, Inc. and Goldcorp, Inc.
The fund has returned 16.08% year to date and currently carries Zacks Rank #2 (Buy).

RS Global Natural Resources A (RSNRX - MF report) invests most of its assets in securities of global natural resources companies. These companies should have a presence in a minimum of three countries, including the US. The fund aims to hold about 30 to 40 security positions.

Top holdings include First Quantum Minerals Ltd, Mosaic Co, Sociedad Quimica Y Minera De Chile SA ADR and Antofagasta PLC.

The fund has returned 4.11% year to date and currently carries Zacks Rank #1 (Strong Buy)

BlackRock Commodity Strategies Investor A (BCSAX - MF report) employs two strategies and seeks total return. Firstly, the fund invests in commodity-linked derivatives. The second strategy is investing in commodity-related companies. These firms may include companies with operations related to mining, energy and agricultural sectors.

Top holdings include Royal Dutch Shell PLC, Exxon Mobil Corporation, Chevron Corp and BHP Billiton PLC.

The fund has returned 3.83% year to date and current carries Zacks Rank #1 (Strong Buy).

About Zacks Mutual Fund Rank

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