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'Moderate bull' finds resources safe

Gut-check time is coming if you're one of those investors who have been making scads of money in natural resources mutual funds over the past four years.

Are you willing to hang tight through a correction - natural resources are cyclical and corrections always come eventually - or do you want to play it safe and protect your gains?

Can't decide? Then maybe Fred Sturm can help. Mr. Sturm is the long-time manager of Mackenzie Universal Canadian Resource, the largest natural resource fund in the country by far, and he's got his head screwed on properly on the matter of risk. Compare his fund with its peers and you'll find it's a fair bit less volatile.

A few other things you should know about him: He has 25 years of experience in the investing industry, he's the single largest individual investor in his fund, and he describes himself as a "persistent but moderate bull" with respect to commodities.

Here's where the gut check comes. As Mr. Sturm sees it, the commodity boom has another 12 to 16 years to run. Before we get to the end, however, there's going to be a recession that will scare some investors away from commodities. How should investors prepare?

"For those who have the perspective into the next decade and can truly absorb the volatility, then I say stay the course and let your profits run," Mr. Sturm said in an interview yesterday before addressing investment advisers in Ottawa.

As for more conservative types, he suggested they use today's strength in commodities to sell their holdings down to a level appropriate with their risk tolerance. Not surprisingly for a resource fund manager, Mr. Sturm doesn't believe in getting out of oil and metal stocks entirely. Holding a resource fund, he argued, is almost like a kind of insurance against one of those geopolitical shocks that sends the price of oil soaring.

Mr. Sturm's overall bullishness on commodities is based primarily on the growing demand for energy and metals from developing economies.

Here is a little factoid he uses to illustrate why he is bullish. In the U.S., with a population of 300 million, the average person uses 25 barrels of oil a year. In Asia, with a population of 3 billion, the average person uses two barrels a year.

For the time being, Mr. Sturm sees energy and metal stocks as being in what he calls "the big, fat middle," where prices don't rise every day and instead reach a plateau at nicely profitable levels. He noted that while oil prices are in the range of mid-$60 (U.S.) a barrel, oil producers can still make a decent living at $50.

Strong commodity prices depend on vigorous economic activity, and there have been signs the U.S. economy is starting to slow down. Never fear, Mr. Sturm said. Growth will rebound later this year and into 2008 when the country heads into an election. Historically, the U.S. economy does very well in election years.

The recession comes next, around the end of the decade. And then, after a few years of gathering strength, comes a commodity rally caused by demand for oil and metals from emerging economies.

"It's going to be an exciting finish," Mr. Sturm said. "At some point, it will be a challenge to accommodate the wishes of an additional three billion people. It could be an elbows-up kind of situation."

Here are a few other nuggets of advice for resource investors from Mr. Sturm:

Remember to assess the resource exposure you have in your diversified Canadian equity funds as well as any resource funds or stocks you have. Mr. Sturm calls this double-counting, and he said this simple step would have saved a lot of grief during the tech stock meltdown.

Think globally: Mr. Sturm said his holdings are roughly divided 50-50 between Canadian and foreign resource stocks.

In a sideways commodity market, focus on big, franchise names rather than on speculative stocks: "There will come a time when oil goes from $50 to $100, and then you'll want to buy a junky junior oil stock with a lot of debt," Mr. Sturm said. "Focus on the better businesses, rather than the story of commodities going up every day."

rcarrick@globeandmail.com

By the numbers

Mackenzie Universal

Canadian Resource Fund:

Manager Fred Sturm

$1.1-billion

Assets in the fund

1

Rank of the fund among natural resource funds (by assets)

18.6 %

The fund's 15-year compound average annual return

13.7 %

Average annual 15-year return for resource funds

7.9%

The fund's one-year return

Rob Carrick

© 2007 The Globe and Mail. All rights reserved.

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