(MONEY Magazine) – BEYOND THE HEADLINES
If Oil Drops, Hot Funds Will Chill
• In a meek stock market, funds in two sectors--natural resources and utilities--have bashed all comers of late. With oil pushing $70 a barrel at the end of summer and utility funds yielding as much as T-bonds, you may be tempted to jump on board. Don't.
Natural resources funds have soared for the past two years as a healthy U.S. economy and a red-hot Chinese one have driven up demand and prices for oil, gas and industrial metals. But the risk of a short-term setback is growing, warns Morningstar stock analyst Jason Perucki. After such great performance, there's not a lot of growth left in the stocks, he notes. Plus, he adds, "we don't think oil prices are sustainable at $70. Katrina is a short-term situation that will get fixed."
If you've already loaded up, consider trimming back. If not, a 5% allocation to a natural resources fund such as T. Rowe Price New Era (PRNEX), a MONEY 50 fund, makes sense as a long-term inflation hedge. But dollar-cost average your way in to minimize the risk of investing at a market top.
Utility funds tell a winning story too. After the disasters of deregulation (read: Enron), the industry has bounced back. Over the past three years, annualized returns have averaged 18.9%. But further gains may be harder to come by. And in an era of deregulation, utilities funds are no longer Steady Eddie portfolios, notes Andrew Clark, a senior analyst at Lipper.
You may want to look elsewhere for dividends, though probably not at real estate investment trusts (see page 63). An alternative: The MONEY 50's T. Rowe Price Equity Income (PRFDX) fund, which recently yielded 2.2%. --PENELOPE WANG
Midcap, small-cap and international funds are 2005 leaders, while large-caps have yet to pick up.
NOTES AND SOURCES: Unless otherwise noted, data as of Aug. 25 from Lipper, New York; 877-955-4773.  Annualized.  Closed to new investors. N.A.: Not applicable.