MUTUAL FUNDS. High risks in commodity funds

Inflation has been chained up since 1980, but the beast is stirring and investors are starting to look at ways of coping with it. Traditional places to invest during inflationary times are hard assets such as real estate, gold, and art. Gold and precious metals mutual funds - which benefit both from inflation and from the falling dollar - are already doing well (story on preceding page). What about commodity-oriented mutual funds? Shouldn't they do well when prices rise?

That might seem logical, but history hasn't been kind to commodity funds.

Edwin Elton, professor of finance at New York University, says commodity funds are ``very poor investments'' and don't mirror inflation. This is largely because these funds follow strategies that emphasize frequent trading of commodity futures, he says. If they simply bought a basketful of, say, gold, grain, oil, or metal futures and hung on to them they might do better.

Commodity fund fees, says Mr. Elton, take about 19 percent out of your investment, on average, each year. So the funds have to earn at least 19 percent a year for your investment simply to break even. Yet the average annual return of the all commodity funds, according to a study by Elton and his colleagues, was minus 4.35 percent from July 1979 through June 1985 - and the pattern holds into 1986, he says.

What's more, with an average of 45 funds in operation between 1979 and 1985, 14 went broke. That's 31 percent.

A recent study of commodity funds by Professors Elton, Martin Gruber of New York University, and Joel Rentzler of Baruch College concluded that ``the returns on these funds are highly variable -- significantly more so than bonds and common stock investments -- making them very risky.''

Because of this, many mutual fund families have simply avoided commodity funds. Brian Mattes, a spokesman the Vanguard Group, says ``no one at Vanguard has felt comfortable with them.''

Still, commodity futures are attractive to certain daring investors. For these people, a fund or pool could still be better than trying to participate directly in the commodity markets.

Wealthy investors often choose managed commodity accounts, where a minimum investment might be $100,000. A smaller investor with only $1,000 or so to invest might go with a commodity mutual fund.

One of Prudential-Bache's commodity funds (which invest in both hard commodities and financial futures) leads the industry. It is the Chancellor Futures Fund, which started in 1979 at $1,000 a unit. As of April 30, the net asset value was $2,216 a unit, says Robert Morford, a vice-president in the commodity division of Prudential-Bache Securities. Three other Chancellor funds, Mr. Morford says, are not doing very well.

Several new ones are being developed by Pru-Bache and other companies. Even though the Pru-Bache fund has done quite well, Morford counsels caution to potential investors. It is very important, he says, to understand the concept behind commodity funds, know their risks, and realize that they are highly leveraged and contain substantial fees because of their intensive level of management.

And beware, he says. When articles about rising gold and other commodity prices are in the news, some brokers try to ``sell the sizzle.'' But if prices of commodities don't do well, neither does the fund.

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