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Tomorrow has little allure for mutual fund investors

But gold, energy funds are likely to keep rising

"Tomorrow is another day," declared Scarlett O'Hara in "Gone With the Wind."

"The sun'll come out tomorrow," sang the plucky orphan in "Annie."

"I can't wait until tomorrow . . . 'cause I get better looking every day," quarterback Joe Namath wrote in his book with that title.

Tomorrow does not hold such allure for mutual fund investors in 2004.

Tomorrow has become a worrisome destination where bad things could happen at the gas pump, on the battlefield or in the voting booth. Presidential debates highlighted more problems than surefire solutions. The average stock mutual fund declined 2.2 percent in the third quarter.

Investors have been seeking cover in mutual funds that invest in gold, natural resources (such as oil, copper and timber), and real estate. Like Scarlett's beloved home, Tara, such tangible investments benefit from scarcity and demand.

As worldwide demand for oil continues to grow, investors are less confident that oil prices will slide back below $50 a barrel once hostilities end in Iraq. Turmoil has made volatile gold a star again, pushing it well beyond $400 an ounce, though it should be held mostly for diversification and should never constitute more than a small portion of an individual's portfolio.

The mutual fund managers who were at the top of the performance heap in the third quarter predict oil and gold prices will continue even higher, and they believe investor mutual fund holdings should reflect that.

"In the mid- to late 1970s, when the price of oil went up sharply, one reason gold peaked at $810 an ounce was that people in the Middle East were using excess money to buy gold as an investment," said Charles de Vaulx, portfolio manager for First Eagle Gold, up 16.35 percent in the quarter. "I suspect this is starting to happen now and will continue as long as the price of oil stays high."

Asian central banks have purchased so many U.S. Treasury bonds in the past two years that they may decide to diversify reserves by buying gold. That's why Vaulx is high on prospects for gold-mining stocks such as Harmony Gold Mining Co. (HMY) and Gold Fields ADR (GFI).

The natural resources sector, specifically oil, continues its run-up. If you're a motorist, you already know.

"There is growing demand for commodities, especially energy, from countries such as the United States and China," said Kevin Baum, portfolio manager for Oppenheimer Real Asset Fund, up 16.95 percent in the quarter to lead all mutual funds. "With inventories very low for most commodities, investors with a long-term horizon should expect to see strong long-term returns."

Baum steers clear of stocks, instead investing in hybrid instruments such as futures and options whose moves are tied to price changes in 24 commodities, including energy, metals, agriculture and livestock.

"A lot of investors looking at the trade deficit, budget deficit and war in Iraq see a lot of risks in the economy going forward, and that's driving them to gold," explained Joseph Foster, portfolio manager of Van Eck International Investors Gold, up 15.77 percent in the third quarter. "We've been in a bull market for gold for three years, which I expect to continue for some time, so it's not too late to establish a position in gold."

The collapse of the Nasdaq bubble started the move toward commodities to balance portfolios. Foster, who recommends a 5 to 10 percent holding in gold mutual funds or gold-mining shares for all investors, expects that gold could push up to $500 an ounce if it can break through the $430 an ounce level.

Meridian Gold (MDG) and Placer Dome (PDG), among larger stocks, plus Miramar Mining (MNG), Orezone Resources (OZN) and Wolfden Resources (WFDNF), among smaller stocks, are Foster's favorites.

Latin American funds excelled in the third quarter, as some political uncertainty was resolved in Venezuela, as Brazil rebounded and as the U.S. dollar remained weak. Merrill Lynch Latin America Fund, up 16.82 percent in the quarter and run by William Landers, is banking for the future on conservative stocks such as the oil company Petroleo Brasileiro, the telecom Telefonos de Mexico and the retailer Wal-Mart de Mexico.

The U.S. election will likely play a role.

"If current investment caution exists because investors are doing nothing until after the presidential election, the market should get a nice rally until the end of the year, no matter who wins," said Don Cassidy, senior research analyst with Lipper Analytical Services in Denver. "In the meantime, investors are picking up more on the idea of inflation and owning hard assets than are most analysts or government spokespeople."

Investors should expect value stocks — selling at lower prices but with strong prospects — to outperform growth stocks for a while, Cassidy said.

Top-performing funds in the third quarter, according to Lipper Analytical Services, were:

Oppenheimer Real Asset (QRAAX), $885 million; 5.75 percent load; $1,000 minimum; 800-525-7048; up 16.95 percent.

Merrill Lynch Latin America (MDLTX), $119 million; 5.25 percent load; $1,000 minimum; 800-995-6526; up 16.82 percent.

First Eagle Gold (SGGDX), $659 million; 5 percent load; $1,000 minimum; 800-334-2143; up 16.35 percent.

Morgan Stanley Latin American Growth (LATBX); $37 million; 5 percent load; $1,000 minimum; 800-869-3863; up 16 percent.

Van Eck International Investors Gold (INIVX); $271 million; 5.75 percent load; $1,000 minimum; 800-826-1115, up 15.77 percent.


Andrew Leckey answers questions only through the column. Address questions to Andrew Leckey, "Successful Investing," P.M.B. 184, 369-B Third St., San Rafael, Calif. 94901-3581, or by e-mail at andrewinv@aol.com.