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Of pork bellies, gold and oil
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April 28, 1998: 2:58 p.m. ET
Oppenheimer Funds is trying to sell commodities market to investors
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NEW YORK (CNNfn) - Russell Read knows he has an image problem. Most investors think commodities are scary, volatile and too risky.
But Read, lead manager of the Oppenheimer Real Asset Fund, is hoping to convince people that putting their money in pork bellies and oil is a great way to diversify.
"Commodities come with a lot of baggage for some investors," Read said. "We're trying to reintroduce this asset class … and offer it as a financial planning tool for long-term investors."
The Oppenheimer Real Asset Fund, the first of its kind, invests one-third of its portfolio in bonds that are linked to the Goldman Sachs Commodities Index, (GSCI) a benchmark that includes energy, industrial and precious metals, agriculture and livestock.
The bonds are "leveraged" three times, meaning they pay three times the index's returns. So a bond would earn 30 percent for every 10 percent rise of the GSCI.
The fund puts the remainder of its portfolio in short-term U.S. government bonds and buys commodities futures as a "daily adjusting tool," said Read. It reserves the right to invest up to 10 percent in junk bonds if the right opportunity comes up.
The fund, with $110 million in assets, was down 18.5 percent a year after its inception on March 31, 1997. By contrast, the GSCI was down 15.79 percent in the same time.
Before those returns stop you cold, consider this: With the U.S. stock market hovering at record highs and many industry watchers predicting a correction because of volatility this week, some analysts think it couldn't be a better time to look at commodities.
Commodities historically do well in bearish markets -- in part because they aren't tied to stocks or other financial assets, said Mark Wright, a senior analyst at Morningstar Inc., a mutual-fund tracker in Chicago.
For example, commodities performed well in the 1970s, when U.S. stocks languished, Wright said.
"Commodities are one of the best diversifyers," Wright said.
So why haven't mutual funds tackled commodities in the past? Until last year's repeal of the so-called "short-short" rule as part of the Taxpayer Relief Act, federal law prevented mutual funds from earning more than 30 percent from short-term gains.
Big mutual fund companies might also believe they have enough commodities exposure through existing gold and precious metals funds, Wright said.
And in a bull market, commodities have little sex appeal, said Daniel Basse, executive vice president of AgResource, an analytical firm in Chicago.
"We need volatility to make money," Basse said. "We need strong demand."
Commodities have been hurt in the past six months because of the Asia slump and droughts caused by El Nino, Basse said. And lagging interest in the markets have forced the cost for a seat on the Chicago Board of Trade to drop from $850,000 to $650,000 in the last year.
While the Oppenheimer fund may use complicated investments, Read, 35, said people should keep one thought in mind: $100 invested is $100 of commodities exposure.
Wright said he has more confidence in the Oppenheimer fund and its managers than other funds he follows at Morningstar.
"Frankly I think this is one of the smarter funds Oppenheimer has developed," Wright said.
(Investors will pay a hefty 5.75 percent load on Class A shares and fees of 1.74 percent. Class B and C shares may have deferred loads and fees of 2.56 percent).
"If commodities go up 10 percent, your money goes up 10 percent," said Read, who earned a doctorate at Stanford University in political economy. He studied the role of natural resources in worldwide economic growth.
The Oppenheimer Real Asset Fund invests in 22 commodities in five categories. Energy represents 50 percent; agriculture accounts for 25 percent; livestock totals 12 percent; and the remainder is split between industrial and precious metals, Read said.
"Commodities comes with a lot of baggage for some investors," Read said. "They think of it as a pretty frightening market … but if commodities are offered in an unleveraged way, then you have an asset class that is a natural for asset planning."
-- by staff writer Martine Costello
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