Buy Oil... But Not Now
Talk to the manager of a sector fund, and he's almost sure to be bullish on his sector. If you find a sector-fund manager who says it's not time to invest in his sector, stop the presses. But that’s exactly what Tim Parker, manager of T. Rowe Price New Era (symbol PRNEX), is saying today. And that makes his advice worth your attention.
The price of oil has more than tripled since bottoming at $31 a barrel on December 22, 2008. Crude has climbed as the economy has improved, and demand for oil and other forms of energy has grown. In recent months, oil’s ascent has seemed virtually unstoppable. Amid continuing turmoil in the Middle East and North Africa, it closed above $112 a barrel on April 21.
But Parker thinks the price has moved far ahead of the fundamentals. “The cards are in place for oil prices to retreat,” he says. “Either the Middle East settles down, or China’s growth slows. The price ought to be in $90s.” If the Middle East doesn’t settle down, Parker says, energy users in the U.S. and elsewhere will find ways to use less oil, resulting in less demand and leading to lower prices. He’s already seeing signs of decreasing demand.
Parker is hardly a commodities bear. But he understands that industries tied to commodities are highly cyclical -- that is, their fortunes wax and wane with changes in the economy. The best commodity investors know when to pull in their horns.
Parker is doing that now, by carrying a little more cash than usual and putting more assets into big, integrated energy companies, whose stocks tend to be more stable than those of firms with a narrower focus. Among his holdings are Chevron (CVX), ExxonMobil (XOM) and French oil giant Total (TOT), shares of which trade in the U.S. as an American depositary receipts. The oil majors pay dividends and are less sensitive to the price of oil than, say, exploration-and-production companies.
Once the price of oil falls -- and Parker expects that to happen within six months -- investors will be presented with a great buying opportunity. “I would get my shopping list ready,” says Parker.
Historically, commodities have been bad long-term investments because rising prices always lead to increases in supply. But rapid economic growth in developing nations means demand is likely to sprint ahead of supply for several more years. “We’re still in a super-cycle for hard assets, including oil,” Parker says. “By the middle of the decade, we’ll have more supply.”
T. Rowe Price New Era is a fine fund for investors who want to diversify into commodity-related stocks. Over the past ten years through April 21, it returned an annualized 12.4%, trouncing Standard & Poor’s 500-stock index by an average of 9.8 percentage points per year.
Of course, most of that sizzling performance was due to soaring commodity prices. New Era actually trailed the average energy-stock fund by an average of 2.3 points per year over the past ten years.
But New Era is a broad-based commodity fund -- one that has tended to hold up best, relative to its peers, during periods when energy prices are falling. It usually has about two-thirds of its assets in oil and gas stocks, and the rest in a variety of other commodity stocks.
An energy analyst at T. Rowe Price for a decade, Parker, 36, took over New Era when its longtime manager, Charles Ober, retired about a year ago. I miss Ober, but I think Parker will do just fine. He was groomed for years and he has the support of Price’s crack team of analysts.
New Era’s Other Commodity Picks
Parker thinks the average investor should have roughly 10% of his or her assets in commodities. He prefers commodity stocks, but you can also buy mutual funds and exchange-traded funds that track the prices of commodities themselves. “Commodities provide diversification and an insurance policy in case inflation does go crazy,” he says.
Parker likes gold, even though its price has doubled over the past four years. He expects the U.S. dollar to weaken over the next two or three years. Ditto for the euro and the yen. Declines in these established currencies should be bullish for gold. His favorite stocks are Agnico-Eagle Mines (AEM), which owns six gold mines in Canada, Finland and Mexico, and Vancouver-based Eldorado Gold (EGO), which operates mines in Brazil, China, Greece and Turkey. Parker says the stocks should perform better than gold itself because the companies are producing more of the yellow metal.
He also thinks farm prices will keep rising as inhabitants of emerging markets improve their diets and, in particular, consume more meat. His favorites for playing the growing demand for better food are fertilizer giants Potash Corp. of Saskatchewan (POT) and Mosaic (MOS). But he’s sold most of his agricultural-equipment stocks, such as Caterpillar (CAT) and Deere (DE), because the stocks have gotten too expensive. “They’re too rich for my blood,” Parker says.
Like most T. Rowe Price managers, Parker is a careful, value-oriented stock picker. New Era is a fine way of taking advantage of rising commodity prices. Just not yet.
Steven T. Goldberg (bio) is an investment adviser in the Washington, D.C. area.