Fund Profile: Fidelity Select Natural Resources Portfolio

by By Ann C. Logue

Nothing says “time to buy natural resources” like a weak dollar, inflation threats and war in the Middle East. It’s no surprise that the Fidelity Select Natural Resources Portfolio is beating the broad market indexes handily.  

Natural resources have three main sources of investment return. The first is basic supply and demand for them as raw materials. If something is going on in the world that changes that, the price changes too. The next source of return comes from the role of natural resources as hedges against inflation and uncertainty. The technical term is “store of value,” an asset that generates no cash flows and thus increases in value precisely with the inflation rate; when inflation goes up, so too does the value of these commodities—and the value of companies that work with them.

The third source of return comes from scarcity value, which is a combination of supply, demand and psychology. Much natural resource investing is based on the so-called “last barrel of oil” theory. That is, eventually, the amount of oil we have is going to run out, and whoever has that very last barrel is going to be able to name the price. One way to ensure that you are the part-owner of that barrel is to buy every oil company out there. The scarcity argument sometimes overlooks that in the long run, we should be able to engineer around many of our natural resources requirements. Humans need water to live, but we did just fine for eons without petroleum, thank you very much, and there’s an excellent chance that we will do so again. Aluminum was once so rare that it was considered to be a suitably valuable metal to form the tip of the Washington Monument. That was before we understood how to refine pure aluminum from bauxite. Now, too many people throw their aluminum cans in the trash, even though it is one of the most easily recyclable materials in use. Scarcity value is usually related to perception, so it can lead to price volatility as traders over- and under-estimate resource supplies.

The Select Natural Resources fund invests in common stock of natural resources and the fund manager can choose any resource out there. Its largest holdings, as of Sept. 30, 2007, were Exxon Mobil Corporation (NYSE: XOM), Schlumberger Limited (NYSE: SLB) and National Oilwell Varco, Inc. (NYSE: NOV). Two-thirds of the fund’s assets are in oil, gas and energy services right now, although it also has positions in metals, mining and chemical companies. The fund manager has the right to buy natural resources directly, but the fund does not hold any now. This is a straight no-load fund with a $2,500 minimum investment (less for certain retirement plans). It has a low expense ratio, 0.86%, and no 12b-1 fee. Lipper ranks it 14th out of 140 natural resource funds for one-year performance and 25th out of 75 funds over five years. 

The fund’s current performance comes from the high weight in the oil industry, which makes a lot of sense right now. West Texas Intermediate Crude closed at $87.50 per barrel on Nov. 13, 2007, an increase of 60.3% from $54.57 at the end of 2006. Meanwhile, one euro was worth $1.28 on Dec. 31 and $1.46 on Nov. 13, an increase of 14.1%—enough to set off the fears of inflation and instability that make natural resources so attractive. That’s great if you owned this fund, or another natural resources fund, up until now. The problem is that with oil prices reaching record highs and the dollar reaching record lows, there may not be a lot of room for price appreciation left. Buying high is rarely a profitable strategy. 
In order to maintain performance, the fund manager has to be able to catch the Next Big Thing in the natural resources market. Maybe it’s helium, which is currently in short supply. Maybe it’s copper. Maybe it’s water. Much depends on how nimble John Dowd is at configuring the portfolio to changing market conditions. Natural resources will always be in demand, but which resources, when, and how will change quite a bit. By the time we’re down to the last barrel of oil, we won’t need it.


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