Investors May Find Gold in Precious Metals

The best may be yet to come for investors in the Lexington Strategic Investments mutual fund, which invests in minerals, metals and hydrocarbons. Put the emphasis on may.

The peaceful transfer of power in South Africa in the last year--coupled with a growing worldwide demand for gold jewelry--translated into 80.8% growth for the fund over the past 12 months and 31.32% over the past three months, according to Morningstar Inc., which tracks the mutual fund industry. So far this year, it’s up about 24%, making it among the best-performing mutual funds in the United States this year.

Now, as worries about inflation have driven the price of gold to about $400 an ounce, fund manager Bob Radsch is rubbing his hands in the hope that the South African gold stocks the fund holds will keep rising in value.

“What’s mouth-watering is if gold has a pretty decisive move to 420 (dollars an ounce), which it could if jewelry demand is strong enough,” Radsch said. “At that point, a short squeeze could develop for producers who have sold forward. That would be good for the price of gold bullion.”

Higher bullion prices are good for South African gold mines because they would encourage greater production. Last year worldwide gold production was 2,281 tons, just under worldwide demand (principally for gold jewelry) of 2,501 tons, Radsch said.

To be sure, what goes up can come down, and funds based on gold stocks are notoriously volatile.

Though the Strategic Assets fund has done well this year and rose a stunning 267% in 1993, making it the best-performing mutual fund in the United States, it has also had some slumps. It was down 60.71% in 1992, down 19.34% in 1991, down 44.27% in 1990, up 55.16% in 1989 and down 46.68% in 1988.

And even as one gold fund does well, another can do badly: The Monitrend Gold fund is down 10.91% over the past three months and down 34.48% over the past year. That’s mainly because Monitrend does not invest in South African stocks and has thus missed out on the salutary effects of the political changes there.

Still, the funds are attractive to investors despite the tendency for returns to fluctuate wildly.

The Fidelity Select Precious Metals Fund, for example, attracted $100 million in new investments during September. That’s after sales were flat for the previous nine months, Fidelity said.

The Lexington Fund holds mainly the American Depositary Receipts of South African gold mines, including Western Areas Gold Mining and Free State Consolidated Gold Mines Ltd.

Radsch is optimistic because demand is great in the Far East, strong in the United States and recovering in Europe.

“Jewelry demand has exceeded gold production over the last couple of years,” he said. “The difference has been made up in the past by big Russian gold sales in 1991 and some central bank sales in 1992 and 1993, but those sales seem to be coming to an end.”

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Shares of paper manufacturers are soaring amid signs that the economic recoveries in the United States and Europe are going to exceed expectations. The trend continues to help funds that specialize in such types, and one of the most successful has been the Fidelity Select Paper & Forest Products Fund, said Morningstar Inc.

The Fidelity fund is up about 20% in 1994, led by gains in stocks such as Stone Container Corp., Temple-Inland Inc. and Weyerhaeuser Co. The fund has been rising since the end of 1990, recording gains of 34.8% in 1991, 12.1% in 1992 and 18.6% in 1993.

“I thought lumber looked the best because it was the biggest beneficiary of the upswing in the housing market late last fall,” Scott Offen, who manages the $65-million Fidelity fund, said in a recent report to shareholders. Therefore, Offen loaded up on shares of Weyerhaeuser, the largest U.S. private owner of forest land.

Weyerhaeuser, based in Tacoma, Wash., has been steadily increasing linerboard prices this year because of strong demand worldwide. Linerboard is used for building walls and corrugated boxes.

“My top stock, Stone Container, which focuses almost exclusively on the linerboard market, has been a standout for us,” Offen said.

Sherman Chao, a paper industry analyst at Merrill Lynch & Co., said he expects paper stocks to rise further. “The pricing recovery in pulp and other paper grades is occurring across the board,” he said.

In the past 12 months, transaction prices for pulp are up 62% and up 36% for linerboard, Chao said. Further price increases are going to be implemented in the fourth quarter, he said.

“We are raising our 1995 earnings estimates to reflect this phenomenon,” Chao said.

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At first glance, the data makes you think that people investing in bond mutual funds for the long term may want to buy funds with sales charges, or loads, rather than those without such charges.

Why pay a load that typically eats up 4% of your investment before your money goes to work?

Because load bond funds are up a cumulative 94.7% in the past 10 years. That’s 16 percentage points better on average than no-load bond funds, according to Dalbar Financial Services Inc.

Some analysts say load funds perform better because they take more risks--to overcome the disadvantage of the sales charge.

But Louis Harvey, Dalbar Financial president, said holders of no-load funds do worse than those of load funds over time because no-load investors tend to change their minds too often.

“Repeatedly,” Harvey said, “investors bought their funds and sold them at precisely the wrong times.

“Attempts to time the market have been greater in no-load funds and the retention rates are also lower, resulting in lower performance than that turned in by (load) fund investors.”

In other words, the loads are a form of discipline, discouraging investors from leaving the fund at the wrong times.

Note: Russ Wiles’ mutual funds column appears today in Section T, a special third-quarter mutual fund report included in editions delivered or sold Sunday.