Natural-Resources Funds Rise With Demand for Raw Materials

Owners of sport-utility vehicles and other cars with large gas tanks are feeling the pain at the pump as the price of oil continues to soar. (By Chris Hondros -- Getty Images)

NEW YORK -- Grumbling about gasoline prices has become as reflexive as complaining about the weather. But at least with rising gas prices, investors in natural resources funds have discovered there is something they can do about the problem.

For starters, they can profit from it, at times handsomely. Surging demand for the oil used to make gasoline, as well as for tin, copper and other metals, has helped vault natural resources funds to among the top performing fund types.

The funds finished the third quarter up an average 7.2 percent, giving them a whopping year-to-date return of 30.7 percent, fund tracker Lipper said.

While the commodities markets are unpredictable, investors could draw comfort knowing they're making some money on higher prices even as they shell out more for Shell at the pump.

"I think it is a hedge against higher prices at the gas pump. You can get something out of it," said Tom Roseen, senior research analyst at Lipper.

And gas prices have not even kept pace with oil lately. This week oil rose to $90 in intraday trading for the first time, before closing Friday at $88.60 per barrel. The run-up is all the more amazing considering that oil started the year near $50 per barrel.

While recent increases in oil have reflected concerns about relations between Turkey and Iraq, strong global economic growth and a falling dollar account for much of the longer-term gains, analysts said. The story is the same for many of the other commodities in which natural resources funds invest.

"Global demand for raw materials has been increasing notably in China as well as other developing areas," said Dan Raab, managing director at AIG Financial Products. "You can't just turn on the tap and produce more commodities -- more base metals, more crude oil. It takes years to develop new infrastructure."

The imbalance between supply and demand has stoked investor interest. Raab oversees the Dow Jones AIG commodity index and notes that the level of investments that track that and other long-only commodity indexes total about $120 billion, up from about $74 billion at the end of 2005.

Raab said that a recent decline in the dollar has helped push up prices because commodities are traded in dollars. It now takes more dollars to acquire a single unit of a commodity, such as one barrel of oil.

But beyond the dollar, development in places such as China, Brazil, Russia and India has placed huge demands on resources.

"It all stems from urbanization and industrialization in developing countries," said James Vail, co-portfolio manager of the ING Global Natural Resources Fund.