For years, Baltimore investment manager Thomas Rowe Price Jr. had urged investors to go for growth stocks-stocks of companies whose earnings were growing consistently at above-average rates.
But as he watched inflation accelerating in the mid-1960s, his enthusiasm for them waned.
“We are now in a new era where the investor is faced with the greatest risks in a lifetime,” he wrote in a bulletin for clients. One of the risks-inflation-would make certain growth stocks less desirable because the companies’ earnings would grow too slowly to offset the decline in the dollar’s purchasing power, he warned.
In 1966, as the consumer price index (CPI) was rising at an annual rate of 3.5 percent-the highest since 1951’s 6 percent-Price recommended a change in investors’ strategy for “the new era”-the inclusion of natural resources and real estate company stocks.
“The investor should include in his portfolio shares in business enterprises owning tangible property that will increase in value as fast or faster than the rise in the cost of living,” he said.
As head of the mutual fund company that bears his name, Price decided to organize a fund that would follow such a strategy.
By January 1969, after the CPI had gone up 4.7 percent in 1968, the New Era Fund was in operation. To help him run it, Price called on George A. Roche, a new securities analyst who had received his MBA degree from Harvard a little more than a year earlier and who, as it turned out, would be named portfolio manager in 1979.
Could a natural resources equity fund be suitable for you now as concerns about a new round of inflation are in the news every few days and cause bond and stock prices to drop.
Looking back after a quarter-century in which inflation got as high as 13 percent in 1979-Price lived to see it recede to 3.8 percent before his death in 1983-Roche makes three points:
– A natural resources fund can outperform the market in years when inflation is raging, as New Era Fund did in ’79 and ’80, when it racked up returns of 60 and 52 percent, respectively.
– It is likely to lag the market when the economy is growing slowly and inflation is low, as in recent years.
– If you want to invest in such a fund, you should consider it only for part of your portfolio, along with diversified equity funds.
The 20 natural resources funds tracked by Lipper Analytical Services, of which the $855 million T. Rowe Price New Era Fund is the largest, fell essentially into two categories: those that are widely diversified across the natural resources industry and those that are concentrated in stocks of companies in its largest sector, energy.
The group’s average total returns of 6.4 and 9 percent for the last 5 and 10 years, respectively, lagged the Standard & Poor’s 500 Index’s average returns of 10.3 and 15.0 percent, but beat the CPI-not a major achievement since it averaged only 3.6 percent for both periods. In 1994, the group has essentially matched the index.
The group’s leading performer over the last decade has been Vanguard’s Energy Portfolio. Managed since inception in May 1984 by Ernst H. von Metzsch, senior vice president of Wellington Management Co., the fund edged the S&P 500 over the last five years and, with an average of 13.3 percent, lagged it slightly over the last 10. Runner-up for the decade: Price’s New Era Fund at 12 percent.
Although able to invest in a range of energy-related businesses, von Metzsch has found oil and gas companies “the most interesting.” He likes to be in about 80 issues, diversified among domestic and international integrated petroleum companies, producing companies, refining and marketing companies, and equipment and service companies.
When he sizes up companies, he takes a value approach-not only the conventional one of looking at ratios such as stock price to book value but also price to the appraised value of oil and gas reserves.
Because of continuing growth in world demand, he expects oil prices in the near term to fluctuate in a range of $18 to $20 a barrel-up slightly but not enough “to upset the applecart.”
Von Metzsch believes domestic integrated companies would benefit more from higher prices and, therefore, has invested about 23 percent of his net assets in them, in contrast with only 8 percent in the internationals. He also has 17 and 18 percent in domestic and foreign producing companies.
