Will Fertilizer Stocks Feed These Funds' Growth?

Fertilizer's not very sexy, but it's a hot commodity these days. Demand is high in fast-growing emerging markets with large populations to feed, such as China and Brazil, and this has led to a number of takeover battles involving major fertilizer producers. Earlier this year, fertilizer giant  CF Industries (CF) outbid a Norwegian firm to buy smaller competitor Terra International, then CF itself became the target of a hostile takeover attempt by rival  Agrium .

The most recent headlines have come from mining giant  BHP Billiton's (BHP) hostile $40 billion takeover bid for  Potash Corporation of Saskatchewan (POT), the world's largest potash producer. Potash is the most profitable of the three major types of fertilizer, with relatively scarce reserves concentrated in Canada and Belarus. Potash mining is very capital-intensive with high barriers to entry, which is why it's such an attractive business for mining firms looking to diversify. Even as Potash Corporation fends off BHP, it faces potential hostile bids from China, which is one of the world's biggest importers of potash and a major customer of Potash Corporation.

These dynamics have boosted the stocks of fertilizer producers lately, after they were hurt in 2009 by a short-term decline in demand. Potash Corporation is up more than 30% in the past month amid the takeover drama and more than 50% in the past three months. The other three biggest players--Agrium, CF Industries, and  Mosaic --are all up more than 30% over the past three months.

Such gains have had a significant effect on funds with big holdings in these stocks. The one agriculture-focused mutual fund, John Hancock Global Agribusiness , has more than 20% of its assets in the four stocks mentioned above (Potash Corporation, Agrium, CF Industries, and Mosaic), and it has gained 25% over the past three months, the best return in the "miscellaneous sector" category. A couple of similar exchange-traded funds, Jefferies TR/J CRB Global Agriculture Equity  and PowerShares Global Agriculture , also have around 20% of their assets in the four fertilizer stocks and have posted similarly strong returns over the past three months.

What about diversified funds? The following table includes the 10 diversified mutual funds with at least $50 million in assets having the largest combined percentage of their portfolio in Potash Corporation of Saskatchewan, Agrium, CF Industries, and Mosaic. It shows each fund's category, the size of its asset base, and its percentile ranking in its category over the past three months and the past year.

Diversified Funds With the Most Fertilizer Exposure

This is a diverse group of funds from six categories; the presence of so many foreign-stock and world-stock funds reflects the fact that three of the four big fertilizer producers are Canadian. At first glance, these funds' recent results seem to be all over the map, but there are some patterns.

By far the worst performer of the group has been John Hancock Technical Opportunities . Although it's in the world-stock category, the fund uses technical analysis (that is, the analysis of stock-price charts and trading data) to make its investment decisions. That has not been a good strategy over the past year, when markets have been extremely volatile and largely driven by macroeconomic factors.

Two of these funds, WHV International Equity (WHVIX) and Delaware International Value Equity (DEGIX), have done considerably worse over the past three months than over the past year, and these also happen to be the two foreign-stock funds on the list. In the case of WHV International Equity, this pattern results from the fact that its portfolio is dominated by industrial and energy stocks. While its holdings in Potash Corporation (a top-10 holding) and Agrium have helped recently, many of the fund's other holdings have had a tougher time amid fears over a slow economic recovery, after having posted big gains in 2009.

The rest of the funds on this list have all performed reasonably well recently, and two of them, Stratton Multi Cap (STRGX) and  GAMCO Growth (GGCAX), have improved considerably over the past three months. While their fertilizer holdings have certainly helped in this sluggish market, they've also benefited from good performance by other mining stocks, such as  Freeport-McMoRan Copper & Gold (FCX).

Over the longer term, the only real standout here is  Amana Growth (AMAGX), whose five- and 10-year returns are among the best in the large-growth category. As these varied returns show, owning big chunks of stocks in the hottest areas can make for good headlines but is no guarantee of overall success.