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Signs of recovery energize resource and metal funds

Both gain an average of nearly 11 per cent, but managers say more positive data are needed if rally is to last


Natural resource and precious metals funds generated robust returns in September as commodity prices rose on signs of a global economic recovery.

Resource and precious metals funds both gained an average of nearly 11 per cent last month, and were among the best performers year to date, according to preliminary data released yesterday by Globe Investor.

Economically sensitive stocks have rallied because there is data confirming a rebound, said Benoît Gervais, a fund manager with Mackenzie Financial Corp., adding that there is a synchronized recovery between developed and emerging markets.

But there could be a pullback in the resource sector if there are any signs that the recovery has stalled, he cautioned in an interview.

"You need constant flow of information to confirm that the economic recovery is on, so that people have higher confidence that those stocks will make money."

The resource sector is "like a garden, where you have flowers for all seasons," said Mr. Gervais, who co-manages the Mackenzie Universal Canadian Resource and Mackenzie Universal World Resource funds.

Base metal and gold stocks started doing well late last fall, but energy stocks - particularly natural gas - have blossomed in September, he said.

Mr. Gervais said his funds are now overweight in the energy sector, and he sees more upside for natural gas stocks as its commodity price rises enough to allow new shale gas players to "generate significant return on capital."

Paul MacDonald, a manager with Mavrix Fund Management Inc., agreed that more positive economic data are needed for the next leg up in the resource sector. "Stocks are no long as cheap as they were three or four months ago," he noted.

Mergers and acquisitions could help keep the rally alive, said Mr. MacDonald, manager of Mavrix Explorer Fund. "The ones with the stronger balance sheets are buying ones with weaker balance sheets."

Mr. MacDonald, whose fund gained 153 per cent for the first nine months of 2009, said he has become more bullish on the fertilizer sector, but as a "contrarian play." He likes stocks like Potash Corp. and Agrium Inc., but said he is buying "for two years out."

The manager said he has trimmed his gas stocks given their recent runup, and his fund is market weight in the oil and base metal and gold sectors.

When it comes to the gold sector, the "wild card is China, with its foreign reserves," Mr. MacDonald said. "If it increases its foreign reserves and starts buying gold as a diversification, we could see significantly higher gold prices.

"We could see $1,200 [U.S.] plus per ounce if there is significant incremental new demand for gold."


Resources and metals on a roll

Group Avg. Group Avg.
Top 5 1 mo. Return YTD
Natural Resources Equity10.5%45.5%
Precious Metals Equity10.5%49.2%
Canadian Small or Mid Cap Equity7.7%37.2%
Emerging Markets Equity7.7%46.7%
Asia Pacific ex-Japan Equity6.3%32.9%
Bottom 5
Japanese Equity-4.2%-2.4%
U.S. Money Market0.0%0.3%
Canadian Money Market0.0%0.4%
Canadian Short Term Fixed Income0.4%2.8%
Canadian Inflation Protected Fixed Income0.8%8.6%
Average for all funds 2.9% 15.7%
S&P/TSX composite index4.8%26.8%
Average as of Sept. 30
Source: Globe Investor

© 2007 The Globe and Mail. All rights reserved.

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