While managers of materials funds may invest in a variety of industries, including steel, glass, paper, and forest products, the volatile gold and metal mining funds have dominated returns of these funds in recent years as the price of gold has skyrocketed.

The $520 million Scudder Gold & Precious Metals Fund (SGDAX) is among the top performers for the three- and five-year periods through the end of 2004. The fund invests almost exclusively in gold and metal mining stocks, with a heavy focus on the major North American producers. The fund has nearly half its assets invested in its top 10 holdings. Manager Euan Leckie saw his portfolio surge 67.1% in 2002 and 94.2% in 2003, before falling 9.1% in 2004.

Although the price of gold rose about 5% last year, and a falling dollar coupled with the war in Iraq sent many investors seeking safe havens like gold, the average gold equity fund fell 8.3% for the year, after rising 61.8% in 2003 and 61.7% in 2002. Given that the price of gold has appreciated about 75% since February 2001, that poor performance could be due to gold and metal mining stocks having been bid up sharply before entering 2004.

In addition, the Federal Reserve’s move to raise interest rates in 2004 caused a sell-off in metals equities as higher oil prices cut into mining profits by boosting the cost of production.

The weak dollar started to present another dilemma: A feeble greenback generally keeps gold prices high, but given that gold is priced in U.S. dollars, it hurts foreign gold producers like Australia and South Africa.

Indeed, the top-performing materials fund for the recent one-year period, the $438 million RS Global Natural Resources Fund (RSNRX), has little exposure to gold or mining sectors. Lead manager Andrew Pilara has benefited from soaring oil prices by keeping about 40% in energy stocks and another 37% in materials and processing.–Palash R. Ghosh