In a July 3 Business article about investment in the oil and real estate sectors, Kurt Wolfgruber, chief investment officer at Oppenheimer Funds, was referred to as Gruber in one instance. (Published 07/06/05).

Admit it.

You looked at returns for real estate-focused mutual funds this quarter (13.15 percent!) and thought maybe it's time you grabbed a piece of that action. Or you peeked at natural resource fund performance for the year so far (16.15 percent!) or the past 12 months (36.91 percent!) and visions of oil wealth began dancing in your head.

Here we go again, you thought. Just like the tech boom, other people are getting rich and I'm not. Last time it was white-hot dot-coms, this time it's $50-plus oil and exploding real estate prices. But hang on.

Before you cash out that value fund and pile into real estate and energy sector funds, think of what happened to tech stock latecomers: The smart money got out in early 2000, and the newbies got burned.

To be sure, the case can be made (and will be made below) that certain well-managed real estate and energy funds have room to grow. And the performance of the rest of the stock market has certainly been a big yawn all year.

The Dow Jones industrial average finished the quarter back where it was at the end of 2003. Which is pretty much where it was in late 1999. The Standard & Poor's 500-stock index has hung on to gains made after the presidential election last year but at 1194.44 as of Friday's close is still below 1999 levels, to say nothing of its bull market high of 1527.46, hit on March 24, 2000.

Overall, U.S. diversified equity funds gained a modest 2.32 percent in the second quarter, according to data by mutual fund tracking firm Lipper, and are now just below even for the year, not exactly setting the world on fire.

So the urge to chase recent big returns is understandable. But especially with real estate, some analysts warn that there is a good chance the easy money has been made and mutual funds focusing on these sectors could be ripe for a fall, or at least a return to much more modest performance.

"Warning lights should be flashing right now," said Roy Weitz, publisher of the Web site Fundalarm.com, which monitors the mutual fund industry. "If these sectors are just coming on your radar, it is almost by definition too late."

Weitz added, "Theoretically, investors already should have had some allocation to real estate and energy in their portfolio. If so, those people should be thinking of trimming back a bit" and taking some profits from the big run-up.

If those who missed the surge simply can't resist chasing performance -- never a great mutual fund strategy -- Weitz suggests pledging to sell if an energy or real estate fund drops by a certain amount.

"What we learned from the tech bubble is that people really need to set a floor for themselves."

Oil's Outlook Depends on China

Of course, it's easy to take the tech bubble metaphor too far, especially when it comes to energy-related mutual funds. Obviously, the world did not absolutely depend on the existence of Kozmo.com, but chances are it will continue to need oil for quite some time, especially with a rising China demanding ever more fuel to feed its burgeoning economy.

That is part of the reason people such as Tim Guinness, manager of the Guinness Atkinson Global Energy Fund, remain committed energy bulls. Guinness's fund has returned 31.48 percent so far this year, making it the No. 1 fund for the six-month period, according to Lipper.

Guinness thinks oil prices will remain somewhere in the $40 to $60 a barrel range for the next five to seven years now that big oil producers such as Saudi Arabia have seen that a price in that range probably won't derail the U.S. and global economies.

"An oil price in that range is extremely bullish for oil and gas shares," he said. "My back-of-the-envelope calculation is that an average oil price of $45 for the next five to seven years means oil shares will move 50 percent higher than where they are today. An average price of $55, and the shares should double. . . . I think the risks are asymmetrically skewed to the upside."

Guinness is especially bullish on midsize oil companies including ConocoPhillips and Amerada Hess Corp., and he likes international energy producers such as Petrobras in Brazil and PetroChina Co. in Beijing.

But Guinness's view on oil is by no means uniformly shared across Wall Street.

Some analysts point to China's transition to coal for electricity production, a rising U.S. oil inventory, a slowdown in the global economy and enormous investments in fuel-efficient cars and alternative energy sources as indicators that oil prices may have peaked. These people generally point to a 1.2 percent drop in China's oil imports in the first five months of the year as an indicator of slackening demand.

In a recent report, Morgan Stanley economist Andy Xie warned of an "oil bubble" and said much of the recent run-up has been driven not by supply and demand but by speculative energy traders at big investment firms that have grown increasingly dependent on returns from their trading profit.

He thinks that higher oil prices will take their toll on an already slowing global economy in the latter part of the year and that the "final frenzy" of speculative oil trading will end soon.

"The global economic cycle looks to have peaked out, but the deceleration has been modest so far," Xie wrote. "This is why financial speculation can still bolster the oil price. I expect economic deceleration to deepen in the fourth quarter this year, such that the oil bubble may then burst. The trigger could be a sharp drop in China's crude imports."

Charles M. Ober, manager of the T. Rowe Price New Era Fund, which focuses on natural resource stocks, is also an energy bull but does not think the business model of many big U.S. oil companies is working. He says many of the giant oil firms have been far too cautious in the past few years, hoarding cash or announcing stock buy-backs instead of reinvesting excess capital.

But he still likes mid-size oil-services companies and thinks that barring a major world economic slowdown, oil prices should remain high, largely because big producers won't let them drop. "Fundamentals are not dictating what is going on now," he said. "In the short run, it's a belief that the Saudis can't or won't bring prices down."

In a recent note to clients, David R. Kotok, chief investment officer at Cumberland Advisors in Vineland, N.J., said that people looking for a return to $30-a-barrel oil prices are "dreaming" and that the current range is probably a plateau on the way to higher prices.

He also proposed what could be a compromise between pumping big money into natural resource funds and sitting out the oil boom altogether: exchange traded funds, or ETFs.

ETFs track an index but can be traded like an individual stock. For energy exposure, Kotok recommended XLE, the Standard & Poor's Energy Spider that tracks 29 companies; IYE, a Barclays Global Investors iShares product that follows 83 companies; and VDE, Vanguard's Energy VIPERs, which tracks 133 companies.

ETFs offer exposure to a broad swath of energy-related companies, insulating against the chances that a single Enron-style blowup could tank a more narrowly focused mutual fund.

REITs' Incredible Pace

Talk of a real estate bubble now dominates polite cocktail party conversation, much as tech stocks did in the late 1990s. But when talking about real-estate-oriented mutual funds, it is important to make a distinction. Most of these funds focus not on residential homes but on real estate investment trusts, or REITs, which mainly invest in commercial properties such as shopping malls, hotels and office buildings.

Still, there is a rising chorus of bears who think REITs are in just as much of a bubble as private homes in hot markets. According to the Leuthold Group, REITs rose 239 percent from the end of 1999 through 2004, a bubble-era kind of pace. The firm also found that REITs now trade at about 16 times the funds they produce from operations, a ratio similar to the price-to-earnings ratio applied to individual stocks. The historical average is about 11.8 times funds from operations.

In addition, Leuthold noted that the flow of money into REITs has become highly volatile, with big swings on a week-to-week basis depending on REIT performance. For instance, in a recent four-week period, mutual fund flows into REITs jumped to more than $1 billion from $357 million. Such fluctuations can signal that investors are jittery and that a sector is about to top out and go into decline.

As with energy, there are plenty of real estate bulls who think there is lots more money to be made in the sector. Among them is Joseph R. Betlej, manager of the Ivy Real Estate Securities Fund, who thinks interest rates are likely to remain low by historical standards despite the Federal Reserve's campaign of short-term hikes while economic growth will continue at a moderate pace.

"We have an economy that strongly supports real estate -- the Goldilocks economy is very good for the sector," he said.

In addition, Betlej said real estate, which tends to hold its value over time, is a very desirable hedge against inflation. And he said baby boomers looking for steady retirement income will continue to flock to REITs because by law they must distribute 90 percent of their taxable income as cash dividends. In addition, he thinks pension funds looking for liquidity to pay baby-boom beneficiaries will also look to REITs.

"We see a huge demand for current-income-producing investments, and real estate is a great source of current income," he said.

Betlej is most bullish on hotels because revenue per available room in the industry is rising as business travelers spend more. And there is still a shortage of rooms dating to a lack of building that occurred after the Sept. 11, 2001, terrorist attacks slammed the travel industry. Betlej is also increasingly interested in apartment buildings, as rental rates are starting to rise. But he remains pessimistic about office real estate because it is costing developers a great deal to find tenants.

And even Betlej doesn't think real estate will be able to keep up the torrid pace of the past few years. Instead, he is looking for returns to drop to 7 to 9 percent a year during the next decade, which he still thinks will compare favorably to both stocks and bonds.

The Perils of Chasing What's 'Hot'

In the end, if you are still thinking of chasing short-term real estate and energy gains it may be helpful to ponder if is really worth the stress. Sure, the sectors have done great lately. But if you look out over 15 years, they have done only slightly better than the 10.16 percent annual return from diversified U.S. equity funds.

Kurt Wolfgruber, chief investment officer at Oppenheimer Funds, thinks both oil and real estate prices will come down. He and William L. Wilby, Oppenheimer's senior investment officer, think growth stocks in the technology and pharmaceutical sectors are primed to advance. And they think the broader market should also take off once the Fed stops raising rates and investors become comfortable with corporate profit growth in the high single digits rather than the double digits of recent quarters.

Over lunch recently, both men said they are on a crusade to persuade investors not to fall for the mutual fund flavor of the month, a strategy they say is the reason the average mutual fund holder fails to beat the Standard & Poor's index.

"It just drives me crazy when people want to chase performance," Gruber said. "It just doesn't make sense." Added Wilby: "You want to buy on fear and sell on greed, not the other way around."