Are golden days here to stay?

Commodities and natural resources funds have been in the sights of many investors over recent years and with good reason.

A look at performance figures for the IMA specialist sector - admittedly an eclectic mix of unrelated funds - shows that the handful of natural resources funds listed there grew by 50% on average over the year to 4 May compared with overall specialist sector growth of 40%. In contrast, the UK all companies sector rose by 28%.

Funds such as JPMorgan Natural Resources or First State Global Resources provide broad-based exposure to a range of oil companies, bulk commodities such as iron ore, and precious metals, especially gold.

There's a strong long-term argument in their favour, with growth fuelled by chronic supply shortages and strong demand from emerging markets as they urbanise and embark upon massive infrastructure projects.

Emerging market infrastructure spending is expected to almost triple between 2008 and 2017 according to JPMorgan.

As the natural resources sector is often driven by different factors from those in other sectors (for example, the discovery of major ore deposits), these funds have historically demonstrated a relatively low correlation with the rest of the stock and bond markets, which is an additional advantage for investors.

Funds have differentiated themselves significantly even within the limited natural resources arena. "JPM and First State have the broadest funds," comments Ben Yearsley at broker Hargreaves Lansdown.

"In contrast, Junior Mining [run by Marlborough Fund Managers] focuses on smaller, more exploratory mining companies worldwide."

Gold funds flying high

However, the most impressive returns over the past year have been achieved by specialist gold funds.

The best-known is BlackRock Gold & General, which Yearsley recommends for anyone wanting that level of specialisation. Investec, Ruffer and Smith & Williamson also have gold offerings.

Investors need to recognise that there may be considerable overlap between the gold and natural resources sub-sectors. For example, Morningstar cautions that BlackRock Gold & General often restricts its gold mining exposure to around 60%.

Conversely, Junior Mining - categorised as a natural resources fund - aims to hold around 70% in gold stocks alongside uranium and base metals. Therefore investors need to assess the remit and make-up of each fund on its own merits.

Clearly, gold has been on a strong upward trend over the past five years or more, rising from just above $400/oz to over $1,200/oz since 2005.

In the past year alone it has gained 33% as investors worldwide have sought to protect the value of their capital. That explains the attraction of gold funds over more general natural resources investments.

And there is little evidence of demand for gold waning, given the continuing uncertainty over macro-economic conditions.

This article was originally published in Money Observer - Moneywise's sister publication - in June 2010