Investors have reacted to recent market trends by pulling money out of equity funds, especially emerging-market and commodity-based investments. Emerging Portfolio Fund Research tracked some $10 billion in investor outflows in the week ended May 24 alone. A similar period of panic selling occurred two years ago at the same time, notes EPFR, which follows 10,000 funds worldwide and some $5 trillion in assets.
"We still believe in the secular bull market for commodities, but as active money managers, we're cautious in the short term," says Frank Holmes, CEO and chief investment officer at U.S. Global Investors in San Antonio. "Pension funds have been investing heavily in commodity-based indexes, and in the short term we're not sure how sustainable this demand driver for commodities will be."
In April, U.S. Global Investors' funds had assets of $4.7 billion, up from $1.5 billion a year before, according to the Financial Research Corporation. In the first three months of 2006, U.S. Global's World Precious Minerals Fund (UNWPX) was ranked second by Lipper in total return among all domestic funds and the Gold Shares Fund (USERX) was third.
U.S. Global has increased the cash position of some of its funds, Holmes says, as it takes a cautious approach to current market conditions.
"Metals often correct in May and June," he explains. "It's a cathartic process. We see it as an over-reaction, but commodities are still over-valued in the short term in our view."
As for emerging markets, such as Brazil, China, India, Indonesia, Mexico, Pakistan and Russia, industrial production should remain strong at about 6 percent a year and higher. And this means that demand for metals and oil should be robust as well. "There is a high correlation here," Holmes says.
Holmes argues that the world is in a secular bull market for commodities, but advises investors to be cautious about over-weighting in natural resources and emerging markets. "We follow Roger Gibson's guidance in his book Asset Allocation: Balancing Financial Risk. He suggests investing a maximum of 25 percent in resources and 25 percent in international funds, and then rebalancing every year."
Performance Pullback International equity funds suffered outflows and poor results in May amid broad market volatility. Some analysts say they don't expect the situation to reverse itself until November.
Lipper's International Diversified Equity Matrix Monthly Total Return for May 2006:
Janet Levaux is managing editor of Research.