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Mining Bets Bring Paydirt for Some Funds

Fundholders should check their exposure to hot commodities.

David Kathman, 03/18/2008

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
($ Mil)
% Rank
in 2007

% Rank

Oppenheimer Intl Small Co OSMAX
Frgn S/M Grth
14 94
Schneider Value SCMLX
Large Value
65 69
CGM Capital Development LOMCX
1 22
Azzad Ethical Mid Cap ADJEX
60 5
AllianceBernstein Intl Growth AWPAX
Frgn Lrg Blend 
17 31
Templeton Dvlping Markets TEDMX
Emerging Mkts
87 81
Excelsior Val & Restructuring UMBIX
Large Value
23 16
Quaker Strategic Growth QUAGX
Large Blend
1 1
Henderson European Focus HFEAX
Europe Stock
59 13
Royce Global Select RSFTX
Small Growth
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.

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