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By Russel Kinnel and Christine Benz | 01-20-2016 12:00 AM

5 Fund Categories Getting Mauled by the Commodities Bear

Commodities funds, understandably, have been hit hard by the downturn, but so have funds in the emerging-markets, high-yield, bank-loan, and value-oriented categories, says Morningstar's Russ Kinnel.

Christine Benz: Hi, I'm Christine Benz for Morningstar.com. Commodities have been at the epicenter of the current market sell-off. Joining me to discuss the implications for fundholders is Russ Kinnel--he is director of manager research for Morningstar as well as editor of Morningstar FundInvestor.

Russ, thank you so much for being here.

Russ Kinnel: Happy to be here.

Benz: Russ, in your latest issue of FundInvestor, you have a discussion of some of the categories that have been hardest hit by this sell-off that we've seen in various commodities, especially energy producers. Let's talk about the commodities funds and the energy-specific funds themselves.

For people who own these funds, what are some things they should be thinking about at this time? They have seen very big losses in their holdings, and I guess it's a natural question to wonder whether such a fund really deserves a spot in your portfolio?

Kinnel: I think it naturally raises those questions because we saw one of the great commodity and energy bull markets and now one of the all-time bear markets as oil keeps getting cheaper and cheaper. You see that reflected in how these energy funds, these commodity funds have taken huge losses.

I think there are a couple of lessons. I think one is that you want to be moderate in your allocation to these kinds of funds, especially commodities fund because commodities are more or less a zero-sum game. There is no reason that they have to go up, but they are a good diversifier. So, keep that position moderate. But I think, from another angle, maybe I wouldn't necessarily completely give up on them because we are at such an extreme low. It may well turn out to be that sometime in 2016 we hit the secular low for this bear market in commodities and energy. So, this might also be a buying opportunity. If you are thinking about the upside, certainly I think commodities and energy probably have as much upside as anything at this stage. But, of course, they also have tremendous downside. So, my message is maybe to think about having a small position in these kinds of names. In my own 401(k), I have maybe a 3% or 4% position in commodities.

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