Keeping tabs on commodities via the Goldman Sachs index has helped Oppenheimer's Real Asset feather its nest

By James A. Anderson, Business Week Online

NEW YORK, Jul. 31 (Business Week Online) - It's a mutual fund, but one unlike any other on the market. It's a play on energy, and to a lesser extent precious metals, cattle, coffee, and orange juice, but not quite like any sector fund you've ever seen before. It invests not in stocks, but commodities. And to cap it all off, its results since the beginning of this year have been nothing short of stunning.

In short, the Oppenheimer Real Asset fund (QRBX) is as odd a bird as you're likely to find gliding about the mutual-fund world. Start with its portfolio. Co-Managers John Kowalik and Kevin Baum are charged to essentially keep tabs on an index -- Goldman Sachs' Commodity Index (GSCI) -- that shadows markets for oil, natural gas, aluminum, pork, corn, and a number of other items traded on the Securities & Commodities Exchange.

That doesn't mean Oppenheimer's fund is exactly stacked with put and call positions or that Kowalik has to show up in the pits to writhe with commodity traders in lower Manhattan. Instead, the Real Asset fund gets its exposure to commodities -- about 65% of its portfolio -- via futures contracts and other derivatives. In order to earn the fund's hefty 5% load, Kowalik looks to mimic the GSCI's weightings but reserves the right to tweak his portfolio to squeeze out extra gains when possible. And since commodities tend to go through sudden price swings caused by the latest typhoon, or even good old economic cycles, the remaining 35% or so of Real Asset's portfolio is parked in cash.

Interesting wrinkle

Cushion or not, Real Asset has had its ups and downs. In its first year, 1998, the fund's total return shrank 44.8% as Asia's economic crises rippled off to swamp global commodities markets. Turn the page to 1999, and OPEC's success in lifting oil prices helped Real Asset race off to a 36.8% gain. This year, through June 30, the fund is still motoring on the fumes of a rally in both crude and natural-gas prices, having posted a 25.2% total return. The big picture: Oppenheimer's fund, which fund researcher Morningstar lumps with Natural Resource sector funds, topped its category, with a 55.4% return for the 12 months ended June 30. But the fund has still fallen 3.5% overall since its inception.

This picture might cast the Oppenheimer fund as something of a bumpy ride, except for one interesting wrinkle: Commodity markets have exhibited an uncanny tendency to race off to impressive gains at just the point when the stock market seems winded. "We're bound to do well when you have strong economic conditions," says Kowalik. "We're talking about inflationary times, times when demand is high and interest rates are increasing -- periods when stocks simply stop doing well." The reason stems from commonplace adjustments to old-fashioned supply-and-demand relationships when the world's economy's grows and contracts. In an upswing, when economies are strong, old-line factories, upstarts, and everyone in between looks to expand production.

True enough to Econ 101, combined demand for raw materials like food and fuel helps commodity prices rise. The funny thing is that the stock market often rises early in the cycle in anticipation of bigger earnings, all at a time that commodity prices slumber. Later on, when earnings look to have capped out, the stock market stalls. Raw materials, meanwhile, are only starting to get pricier.

Oil gush

Put into practice, the Goldman index has put up very impressive returns at a time when the Standard & Poor's 500-stock index was floundering. Take the early '70s, when stocks went on a prolonged slide, falling 14.7% in 1973 and 26.5% in 1974. Those two years, the GSCI humbled Corporate America with gains of 74.9% and 39.5%. In October, 1987, when the market crashed to the tune of a 21.5% drop, commodities rose 1.1%. And in 1990, when the S&P could do no better than a 3.1% fall, the GSCI rose 29.1%. Not only that but the GSCI has an impressive record longer term. Between December 31, 1969, and June 30 of this year, it has sported an annualized total return of 14.2%, edging out the 13.4% for the S&P over the same period.

Right now, the fund's managers are bullish on commodities. "We're assuming the economy has hit the late stages of its business cycle," says Kowalik. "Demand is strong for commodities, and there's a physical constraint on supply, particularly for oil." Put those together and you have an environment that should goose the fund's returns up further. Even with OPEC now mulling over production hikes to ease global oil pricing, it looks as if commodity markets have the stamina to reward investors a healthy amount over the next year. According to his outlook for the next 12 months, Goldman Sachs commodities analyst Steve Strongin projects the index to rise 24%. "Commodity prices should stay strong through the winter," he says. "And our projection could well be skewed upwards if oil supplies are tapped and energy prices spike upward."

Real Asset can thank the weighting of the GSCI for its sparkling results the last 18 months. In order to reflect the size of various commodity markets, the index is predominately stationed in fuels, with energy positions accounting for almost two-thirds of its makeup. Crude oil, for instance, represents 28% of the index, and natural gas is almost 10%. Oil's fantastic run from $12 a barrel to $30 has feathered Kowalik's and Baum's returns.

Looking good

The two managers can thank some other markets also. Once Asia steadied itself, worldwide demand for industrial metals such as nickel picked up. Last year, the GSCI's industrial-metal component -- almost 7% of the index -- finished up 30.8%. This year it's up 3%. In 1999, livestock -- about 9% of the index -- was up 14%, thanks to a 23% increase in hogs and a 13% uptick in cattle. Meanwhile the agricultural component of the GSCI -- prices for wheat, corn, soybeans, cotton, and other items -- has risen 4.6%, thanks to a 20%-plus boom in the cost of sugar. Last year, that segment of the index fell almost 20% in value.

All of which seems to be just another maraschino atop a strong year for the Oppenheimer fund. "Market supply is not keeping pace with demand. We see that demand by power generation is up, demand by chemicals that are gas- and oil-intensive is up. We're drawing down on global inventories," says Baum. "The current outlook appears good for energy-futures contracts and certainly for our fund, too." This odd bird still seems to have some glide left.

31-Jul-2000 15:25:07 (02942846)  Copyright 2000 Standard & Poor's Investment Advisory Services LLC. The information contained in this report may not be published, broadcast, rewritten or otherwise distributed without prior written consent from Standard & Poor's.