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Midyear Investment Review and Outlook : ‘Hard’ Asset Buyers May Be Right, but Early

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TIMES STAFF WRITER

Investing in “hard” assets became a hot concept in the first half, but the end results were fairly soft.

The new raves for tangible investments, such as gold, basic commodities and real estate, were fueled largely by expectations of faster economic growth--and thus higher inflation.

By definition, rising inflation means prices of tangible things go up. And the flip side is that intangible investments, such as stocks and bonds, usually suffer in times of higher inflation.

So some investors either switched significant sums from stocks and bonds into hard assets in the first half, or added small amounts of gold or other tangible investments to their stock and bond portfolios as a “hedge.”

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The payoff for being inflation-wary?

* Nothing in gold. Bullion’s price, $390.80 at Jan. 1, finished the half at $385.80. Most gold mining stocks fared much worse, diving after rocketing in ’93.

* Basic commodities were mixed. Coffee futures leaped 165% for the half, to $1.90 a pound, as shortages developed, and crude oil futures surged 37%, buoyed by the improving world economy. But lumber futures plunged 28% as home building slowed; grain prices melted with spring rains.

Overall, the Knight-Ridder/Commodity Research Bureau index of 21 key commodities finished up just 1.8% for the half.

* In real estate, prices have clearly firmed on many types of properties and in many regions. But real estate mutual funds gave up a meager 2.3% gain as of June 16 to end the half down 1.1%, on average.

The problem for all of these inflation hedges is that there is no serious U.S. inflation to speak of, at least not yet. “The evidence suggests that the commodity bulls may be right, but they are too early,” argues David Shulman, investment strategist at Salomon Bros. in New York.

He sees prices rising later in the decade, driven by increasing consumption in the developing world. But the process will be gradual, and in the meantime many basic commodities remain in excess supply, Shulman says.

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Even so, as the accompanying chart shows, commodity prices overall appear to be in a cyclical upswing. The CRB index is up 15% from mid-1992; the last major commodity bull run, from 1986 to 1988, saw the CRB index rise about 30% before topping out.

Realistically, however, most investors aren’t going to play commodities directly. There is no CRB mutual fund, and individual futures contracts are among the riskiest investments around, suitable only for speculators.

But there are some relatively easy ways to add hard assets to a small portfolio, if you want to bet on inflation, or partially hedge a stock-bond portfolio against damage from a surprise inflation surge:

* Natural resources mutual funds. These generally own stocks of commodity producers--companies operating in such businesses as energy, lumber and mining. This fund category had an average first-half loss of 0.1%, which while disappointing still was far better than the 5.9% loss on the typical stock fund.

The biggest natural resources fund is the Baltimore-based T. Rowe Price New Era fund, which inched up 0.5% in the first half after rising 15.3% last year. Among funds focused on energy, the Vanguard Group’s Specialized Energy fund is up 4.8% this year after a 26.5% rise last year.

* Gold funds. The average gold stock fund sank 11.4% in the half, after soaring 81% last year.

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Paul Stephens, whose San Francisco-based Robertson Stephens Contrarian fund is 25%-invested in gold stocks, says the mining stocks need bullion to move decisively through $400 to restart their rally.

That may take time, but it will happen, Stephens contends. As the world economy grows, inflation will naturally shift from financial assets to real assets, he argues.

* Real estate funds. Craig Litman, whose San Francisco-based firm Litman/Gregory designs mutual fund portfolios for individuals, isn’t enamored of most hedging ideas. But he likes real estate mutual funds, such as Fidelity Real Estate, as diversification tools for traditional stock and bond portfolios. The Fidelity fund rose 2.5% in the first half. Another, New York-based Cohen & Steers Realty, was up 7.3%.

Real-estate mutual funds generally own real estate investment trust stocks, or REITs, which own property directly. Litman expects demand for REITs from small- and mid-sized pension funds to surge, because the funds increasingly are seeking to diversify into property, but only via liquid securities.

Riding the Commodities Market

Prices of many commodities have risen this year as the world economy has picked up steam. But the Knight-Ridder/Commodity Research Bureau futures index of 21 key commodities remains far below its peak level of the 1980s. K-R/CRB index, quarterly closes except latest: 1994: 230.03

Source: Knight-Ridder Tradecenter

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