WealthManagement Magazine

Hot Stuff

Money manager Jim Rogers was ahead of the pack through most of his career. In his younger days, he helped make George Soros into the billionaire hedge fund titan. In recent years, Rogers operated two successful commodity funds. And, in the early 1990s, he hit it big with his book, Investment Biker (Random House Trade Paperbacks, 1994), a tale of traveling around the world on a motorcycle while looking

Money manager Jim Rogers was ahead of the pack through most of his career. In his younger days, he helped make George Soros into the billionaire hedge fund titan.

In recent years, Rogers operated two successful commodity funds. And, in the early 1990s, he hit it big with his book, Investment Biker (Random House Trade Paperbacks, 1994), a tale of traveling around the world on a motorcycle while looking for investment ideas.

Lately the sometime-professor at Columbia Business School has hit some bumps. He has been on the hustings again, flacking a new commodities-investing theme. But the Rogers Funds have become entangled in the bankruptcy mess of commodity broker Refco. Some assets in the funds have been frozen out of the reach of investors.

Lawyers for the funds have sued Refco, claiming that the broker mishandled money. Refco denies the charges. While the lawyers battle, investors may wonder whether Rogers should share some of the blame for the fiasco. In his writings and talks, Rogers warned retail investors to avoid the risky strategy of buying commodity futures on margin. It is currently not clear he followed his own advice.

Whether or not Rogers emerges from the court proceedings unscathed, his writing on commodities is worth considering. In Hot Commodities (Random House, 2004), Rogers argues that the commodities rally that began in 2000 should last for another decade. Investors should load up on commodities of all kinds, including copper, lead, gold, oil and sugar, Rogers says.

Over the years, plenty of would-be gurus have recommended precious metals or pork bellies. But Rogers should not be dismissed lightly, because the money manager has demonstrated a knack for finding the hottest markets. Most notably, he helped found the Quantum Fund with Soros. In his hedge fund days, Rogers made a fortune by placing contrarian bets, sometimes buying commodities while most others were focused on stocks and bonds.

If Equities Bad, Then Commodities Good

In his commodity book, Rogers explains that financial markets have followed a clear pattern for the past 100 years. First, stocks rallied for about two decades. While stocks climbed, commodities stagnated. Then the roles reversed. For a period that averaged 18 years, commodities would rally while stocks went nowhere. During their bull markets, commodities of all kinds have made huge leaps. Sugar climbed 1,290 percent from 1969 to 1974. Oil prices rose to $40 a barrel 15 times in the 1970s.

It is no accident that commodities rise as stocks languish, Rogers said. When commodity prices climb, corporate profits suffer. To appreciate how the pattern occurs, consider the recent record of Kellogg, the cereal giant. During the 1990s, prices were low for energy and commodities like sugar, corn and wheat. That helped Kellogg record wide profit margins and healthy stock gains. During the current decade, rising commodity prices have eroded the cereal maker's margins, and shares have made little progress.

Commodity bull markets occur because of simple supply and demand. The current surge had its beginnings in the 1990s when technology stocks were the rage. At the time, investors poured billions of dollars into computer and software makers. Technology companies responded by building more factories and laying more fiber-optic cable than anyone needed. Meanwhile, with worldwide deflation in commodities (remember oil at $10 a barrel?), few speculators dreamed of taking flyers on copper mines. That left commodity producers with little capacity. “No one has opened a new lead smelter in the U.S. since 1969,” says Rogers. “The last oil refinery was built in 1976.”

While supplies stagnated, demand for commodities kept rising. Newly industrialized China was becoming the world's factory and producing its own consumer class. Now China ranks as one of the biggest commodity consumers in the world. The country, which once exported oil and iron ore, is a now a massive importer.

Eventually investors will recognize the shortage of commodities and begin financing new facilities. But that will not happen overnight. It takes years to win government approval and start operations at a lead mine.

Even if the commodities rally peaks sooner than Rogers expects, there is still good reason to invest in commodities or natural resources stocks. “Commodities can be good diversifiers,” says Russ Charvonia, a financial advisor with The Renaissance Group, a registered investment advisor in Ventura, Calif., that is affiliated with Linsco/Private Ledger. “Oftentimes commodities will move up when bonds and stocks are going down.”

How to Play

Cautious investors may want to start with a relatively mild-mannered fund that invests in the stocks of resource companies. A good choice is T. Rowe Price New Era, which owns a broad portfolio of high-quality blue chips, including ExxonMobil and gold miner Newmont Mining. Another option is RS Global Natural Resources, which holds a mix of big and small stocks, like aluminum maker Alcan and Forest Oil.

While natural resources stocks may thrive, they probably won't produce the biggest gains, says Rogers in his book. That's because these shares correlate somewhat with the overall stock market: If the market's mood turns sour, energy stocks can drop — even during periods when oil prices are rising. For better results — but perhaps more volatility — consider funds that invest directly in commodities or instruments that track commodity prices. PIMCO Commodity Real Return invests in derivatives that track the Dow Jones-AIG Commodity Index. The benchmark rises and falls along with the prices of copper, oil, sugar and other commodities. The Dow Jones index can only have up to 33 percent of its assets in energy. For a bigger stake in oil, try Oppenheimer Real Asset, which tracks the Goldman Sachs Commodity Index and has about three-quarters of its assets in energy.

Rogers worries that the rally in commodity prices will help to trigger inflation. Those who share his concern may want to consider Permanent Portfolio, a fund that has 20 percent of its assets in gold bullion. For additional protection against trouble in the U.S., the fund owns silver and Swiss securities. The strategy is unusual, but, in the last five years, Permanent Portfolio has returned 11.7 percent annually, outpacing the S&P 500 by 13 percentage points.

Exiting

When should you consider selling commodities? In the past, rallies only ended when commodity prices hit record highs, says Rogers. The bull market began five years ago, and, so far, prices show no sign of hitting the peak. “Most commodities are far below their all-time highs,” says Rogers. “Sugar is 85 percent below its high. Bull markets do not end with things 85 percent below their all-time highs.”

Rogers figures that the end will be near when we experience a commodity frenzy. When that happens, mutual fund companies will bring out a slew of commodity funds, and business shows will talk endlessly about the need to invest in commodities. So far, interest in commodities remains limited. “Everybody is focused on stocks and bonds, and that is the time to buy commodities,” said Rogers.

Hot Dots With Legs?

These commodity-oriented funds often soar when stocks are sinking.
Fund Ticker 1-year Return 3-year Return 5-year Return R-Squared Maximum Front-end Load
Oppenheimer Real Asset A QRAAX 27.9% 29.1% 14.0% 11 5.75%
Permanent Portfolio PRPFX 10.7 14.1 11.7 6 0
PIMCO Commodity Real Return A PCRAX 21.9 25.4 N/A 3 5.50
RS Global Natural Resources RSNRX 55.5 41.2 27.0 8 0
T. Rowe Price New Era PRNEX 36.4 33.1 16.5 22 0
Source: Morningstar. Returns through 9/30/05.
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