Mining Bets Bring Paydirt for Some Funds

In the volatile, up-and-down market of the past year, one group of stocks has remained surprisingly resilient--mining stocks. Seemingly insatiable demand from emerging markets, especially China and India, has kept commodity prices high for the past several years as those countries build out their infrastructures. As a result, mining companies are swimming in cash, and a wave of consolidation has swept the industry as firms compete for economies of scale.

Skeptics (including some Morningstar stock analysts) have been predicting for a while that mining stocks might be peaking, but they've continued to be strong performers. In 2007, four mining-related industries--coal, mining (nonferrous & nonmetals), gold and silver, and aluminum--were among the five best-performing stock industries, each with an average return between 40% and 70%. (Only agrochemical stocks, which are also commodity-driven, had a better average return last year.) This year returns have been much more subdued because of the general economic malaise, but mining stocks have held up well under the circumstances. The four industries noted above are still among the best-performing categories for the year to date through March 10.

Back in November, we looked at the mutual funds with the biggest stakes in gold and silver stocks. As we noted at the time, there are many specialty mutual funds dedicated to such stocks, and quite a few diversified funds with significant holdings as well. To a lesser extent, the same thing is true of coal, aluminum, and nonferrous and nonmetal mining stocks, even though they're not quite as sexy as gold. Several funds in the specialty-precious metals and specialty-natural resources categories, such as Vanguard Precious Metals and Mining VGPMX and BlackRock Global Resources SSGRX, have more than 30% of their portfolio in those three industries, and nearly all funds in those two categories have at least some exposurePAGEBREAK.

To make things more interesting, we eliminated sector funds and looked at which non-specialty funds have the biggest mining stakes (excluding gold and silver). The following table shows the 10 funds with the greatest combined percentage of their portfolio in the coal, aluminum, and mining (nonferrous and nonmetals) industries. We show each fund's category, the size of its asset base, the percentage of its assets in the three industries, and its percentile ranks in its category for 2007 and for the year to date though March 11.

Diversified Funds with Big Mining Bets
Fund	Category	Size ($ Mil)	Mining (%)	% Rank in 2007	% Rank YTD*
Oppenheimer Intl Small Co OSMAX	Frgn S/M Grth	2,598.4	20.39	14	94
Schneider Value SCMLX	Large Value	298.4	18.26	65	69
CGM Capital Development LOMCX	Mid-Blend	507.1	16.76	1	22
Azzad Ethical Mid Cap ADJEX	Mid-Growth	3.3	13.42	60	5
AllianceBernstein Intl Growth AWPAX	Frgn Lrg Blend	3,232.5	11.09	17	31
Templeton Dvlping Markets TEDMX	Emerging Mkts	5,224.2	11.00	87	81
Excelsior Val & Restructuring UMBIX	Large Value	9,248.5	10.96	23	16
Quaker Strategic Growth QUAGX	Large Blend	896.6	10.83	1	1
Henderson European Focus HFEAX	Europe Stock	1,227.2	10.62	59	13
Royce Global Select RSFTX	Small Growth	6.7	10.24	10	1
* As of 3-11-2008.

This list includes both foreign and domestic stock funds from nine different categories. As that diversity implies, the specific mining stocks held by these funds vary quite a bit. The top fund on the list, Oppenheimer International Small Company OSMAX, has several small Canadian mining companies such as HudBay Minerals and Anvil Mining among its top holdings, and most of its mining holdings are not listed on U.S. exchanges. In contrast, the second fund on the list, Schneider Value SCMLX, gets most of its exposure from the two largest U.S. coal companies, Consol Energy CNX and Arch Coal ACI, which are its largest and third-largest holdings.

Those big mining stakes appear to have helped these funds' performance last year, which is not surprising given how well mining stocks did. Six of the 10 funds on the list had 2007 returns in the top quartile of their category, and two of those, CGM Capital Development LOMCX and Quaker Strategic Growth QUAGX, were among their category's best performers. (Both of those funds also have great long-term records, though CGM Capital Development is scheduled to merge into its larger sibling, CGM Focus CGMFX, in May.) Of the four funds that trailed their category, Schneider Value is a large-value Analyst Pick, and Templeton Developing Markets TEDMX gained 28.8% last year but was unable to keep up with the red-hot (at the time) diversified emerging-markets category.

This year, these funds' relative returns have continued to look good, for the most part. Oppenheimer International Small Company is the only one that looks significantly worse, but that's because the foreign small-cap stocks it holds have fallen out of favor, and not because of its mining holdings. It remains an open question how long mining stocks will continue to outperform; they've certainly slowed down in absolute terms, and at some point they're likely to hit a rougher patch. As you can see from the table above, these stocks can be held across a wide variety of mutual funds, so it's a good idea to be aware of any exposure to mining stocks you might have in your portfolio, and the risks involved.

David Kathman is a fund analsyt with Morningstar.