Improved technology and new discoveries have allowed mining and exploration companies to extract greater quantities of raw materials from the earth more quickly and efficiently than ever before. The spike in oil prices over 2004-2008 also attracted the attention of many reluctant investors, but some are not qualified to invest in working interests, drilling partnerships or other high-risk ventures, and lack the capital necessary to purchase royalty interests.

Natural resource funds provide diversified exposure to a large segment of the economy, and often with less risk to investors than direct participation programs. This article will examine the nature and composition of these funds, as well as the type of investor for whom they are appropriate. (To read more on this topic, check out Personalizing Risk Tolerance .)

Natural resources funds are funds that invest in the stocks of companies that are in the business of extracting, developing, refining and processing raw materials of any kind. Although this primarily pertains to energy and fossil fuel companies, it also includes timber and forestry, and alternative sources of energy, as well as other ores and minerals. Co mpanies that provide technology, equipment and other related goods and services can be included here as well.

Sometimes this sector includes precious metals. even though they also have their own classification. The vast majority of natural resource funds also tend to invest almost exclusively in stocks, either domestically or globally. Many of these funds fall into the growth category in the Morningstar style box. although value and blended funds exist as well. Funds of all market capitalization ranges exist within these parameters. (To learn more, check out Build A Model Portfolio With Style Investing .)

Historical Performance

Like real estate funds, natural resource funds tend to follow their own cyclical paths, and have a relatively low correlation with the overall market. The performance of natural resource funds is most affected by major discoveries of deposits of any kind of mineral or fuel being searched for. This sector has been buoyed in the 2000s by the spike in oil prices and rising prices for gold and other metals.

According toFundAlarm, the natural resource sector was the best-performing sector of Morningstar’s eight specialty categories in a five-year period ending in 2008. The average annual total return of the natural resource sector for the five-year period ending on July 31, 2008, was a whopping 27%.