An Auspicious Beginning for a Real Asset
The OppenheimerFunds group could not have picked a more auspicious date to launch its new Real Asset Fund.
When the portfolio debuted March 31, the Dow Jones industrial average tumbled 157 points amid fears about rising interest rates and inflation. Real Asset, which aims to help investors diversify their overall holdings away from the stock and bond markets, escaped the carnage with no change in its per-share price.
The New York family could not plan such a fortuitous beginning, since mutual-fund launches are set weeks in advance. But the coincidence helps to underscore why a product like Real Asset could prove popular.
The value of this fund rises and falls in relation to commodity prices, not stock or bond prices. That provides an important attraction for stock and bond investors hoping to diversify or lessen the riskiness of their overall portfolio without necessarily sacrificing upside potential.
“This is really a different kind of fund,” says Russell Read, an Oppenheimer vice president who heads the fund’s three-person management team. “It’s meant to provide the first access to returns in the commodity markets for average investors.”
Various limited partnerships offer commodity exposure, but they’re restricted to wealthy investors who generally do not enjoy ready access to their money. Partnerships also typically employ more speculative tactics than the Oppenheimer fund will use.
Oppenheimer took more than two years to develop Real Asset, with much of the effort spent convincing regulators that this mutual fund was not a commodity partnership in disguise, Read says.
A key difference is that Real Asset won’t use leverage or borrowing in an attempt to boost gains at the danger of magnifying losses. While the managers enjoy latitude in holding a variety of investments, Read says the intent is to stake roughly two-thirds of the fund’s assets in plain-vanilla, short-term government bonds and the remainder in bonds whose principal values fluctuate with commodity prices.
On balance, management will attempt to provide $1 in commodity exposure for every $1 in shareholder assets, Read says.
Which commodities? The fund aims to track movements in the Goldman Sachs Commodity Index, a benchmark of world production in five key areas.
Specifically, the fund will maintain roughly 55% of its asset exposure in energy, 25% in agriculture, 11% in livestock, 6% in industrial metals and 3% in precious metals.
These weightings reflect the importance of each area in the global economy. The hefty energy stake is notable, as is the minuscule presence of precious metals.
Mutual funds are prohibited from owning tangible assets directly, so the fund must rely on the commodity-linked bonds, whose principal values rise or fall with changes in commodity prices. Such bonds are issued by multinational banks or leading commodity-producing companies with high credit ratings. They are derivatives--financial instruments whose values are pegged to price changes in an underlying asset or assets.
“Derivatives are important in this fund because we don’t want to own pigs directly,” says Read, only partly in jest.
Derek Sasveld, a senior consultant at Ibbotson Associates in Chicago, believes the concept behind the Oppenheimer fund is sound. Despite popular opinion to the contrary, he says mutual funds that target precious metals and natural resources are not great diversifiers because they own stocks and thus move in the same direction as the stock market--they have positive “‘correlations.” Real-estate funds are even worse in this regard, Sasveld says.
Yet commodities have negative correlations with both stocks and bonds, meaning that these financial instruments tend to move in opposite directions from tangibles, although not in perfect reverse lock step.
Commodity prices often rally at times when stock and bond prices are lackluster, and vice versa. During the 1970s, for example, the Goldman Sachs index returned nearly 22% a year on average--compared with roughly 5.9% annually for the Standard & Poor’s 500. But during the early 1980s, stocks returned 17.5% a year on average, versus 3.6% for the commodity indicator.
Real Asset could fare well for several reasons--for example, if inflation rises or commodity consumption expands in developing nations.
Read suggests that people limit their stakes in a commodity play like Real Asset to no more than 10% of their investments. He predicts the Oppenheimer portfolio will prove to be roughly as volatile as the typical small-stock fund, except that the gyrations won’t coincide with the stock market’s ups and downs.
The fund [(888) 470-0861] requires a $1,000 normal minimum, or $250 for retirement accounts. Investors face a maximum sales charge of 5.75%.
Russ Wiles is a mutual fund columnist for The Times. He can be reached at russ.wiles@pni.com
