But a rebound may be quicker than you think.

Is this all there is? That's what some advisors and investors were asking at the end of last year when natural resources funds, supposedly a hedge against a bear market and global turmoil, had a down year.

The average natural resources fund dropped 6.1% in 2002 and sported a lackluster annual five-year return of 2.14%, according to Morningstar. Even with far less excess capacity in world oil supplies than the last time war with Iraq erupted, the price of oil stocks seems largely indifferent to the pending confrontation.

"It was a kind of mixed year for natural resources funds. Oil prices went up, but the performance of many energy companies has been somewhat disappointing," says Charles Ober, fund manager of T. Rowe Price's New Era fund. Indeed, only eight of some 30 natural resources funds tracked by Morningstar were in the black in 2002.

New Era, one of the oldest and best known funds in the natural resources sector, was down 6.54% last year, but its three-year number through February was good on a relative basis, up 5.2%. Still, some would say that the absolute performance was disappointing, even though the fundamentals seemed to favor this kind of investing. "The problem is there has been a divergence between oil and gas prices and the price of energy stocks," says Langdon Healy, an analyst with Morningstar.

"We don't turn on the spigot when prices are high, and we don't turn it off when prices are low," said a spokesman for Exxon Mobil, the most popular stock in the natural resources category. The oil companies haven't had to worry about the latter.

Oil prices recently surged past the $34 a barrel level, a remarkable jump given that they were about $18 in January 2002. There is a premium because of fears that inflation could start heating up if the United States goes to war in the Iraq.

The companies most commonly found in these portfolios are Exxon Mobil, Chevron Texaco and BP. Such so-called integrated giants are involved in almost every aspect of energy operations. And because these companies tend not to bet on any one side of the business-refining, exploration, oil prices or distribution-they are not as risky as a business specializing in exploration or distribution. Some of the big oil companies have become a part of the mainstream American economy and are living or dying with its ups and downs, analysts say.

This is why energy funds, observers say, have not had outstanding returns in an environment that ostensibly would seem to favor them. So when will these funds finally start to shine? The answer, suggests one analyst, is that these funds may be doing so already-on a relative basis.

"Actually, all things considered, these funds have done pretty well," says Rueben Gregg Brewer, Value Line's manager of mutual funds research. "Look, the market as a whole was down almost 20% in 2002. I call being down 3% or 4% pretty good in this kind of environment." Most energy funds were up by almost 19% in 2001, he continues, compared with a loss of almost 12% for the S&P 500. Some of Brewer's favorite natural resources funds are Fidelity Select Energy (up 1.4% over the past three years through February) and Franklin Natural Resources (up 2.1% annually over five years ended December 31).

Most advisors buy natural resource funds for their clients because they want a hard-asset hedge against a bear market in garden-variety equities. But they pay a lot for this kind of diversification-the average expense ratio is 1.9% compared with 1.45% for the average equity fund.

There are unrealistic expectations about these funds that come from a misunderstanding of the investment, says one fund manager of a natural resources fund. Most energy funds have a significant correlation with the S&P 500 because they usually load up on diversified oil companies instead of purer commodity investments, such as futures. "These funds tend to revert back to the mean in their performance. They are buying big companies that are not as volatile performers as some that we are using," says Kevin Baum, manager of the Oppenheimer Real Asset Fund.

Baum's fund enjoyed an incredible performance last year. It was up 27.44% (and up another 22.5% in the first two months of 2003), just the kind of number that is an argument for how these funds are supposed to function-outstanding performance when the stock market is in them doldrums.

Baum became a rising star of this sector last year, in part, because he benefited from having some gold in the portfolio. Instead of oil company stocks, he concentrated the portfolio in commodity-linked bonds and commodities futures.

This purer play strategy paid off, but also has had some dicey moments. Oppenheimer Real Asset's five-year number is minus 0.94%, which is mostly the result of losing 44.8% in a disastrous 1998, when the S&P was up almost 30%. Natural resources funds as a group were down 25.34% that year, when inflation was almost nonexistent and the stock market was sizzling.

But in 2002, he took the controversial step of putting gold in his portfolio. Morningstar's Healy, analyzing last year's performance, said that funds in this category that had low gold exposure struggled.

It is not surprising that Oppenheimer Real Asset is now near the top of this greasy pole. Unlike other natural resource funds, Baum's fund doesn't have a significant correlation with the S&P 500. For example, Real Asset has a beta of 0.07, while the average fund in this group has a beta of 0.73.

More traditional funds, such as Vanguard Energy and T. Rowe Price New Era, are expecting to benefit from a turnaround in the stock market and the general economy. Vanguard Energy's beta is 0.64. Its manager says it doesn't need a huge jump in oil or natural gas prices for his portfolio to prosper.

"These days we've been able to pick up a lot of energy companies at huge discounts," said Vanguard Energy manager Karl Bandtel. The fund lost 1.69% last year and had a five-year annual return of 4.69%. Bandtel, a longtime advisor to the fund who just became manager, took a beating last year on his refinery bets. But he believes that he got cheap buys on companies such as Valero Energy and Sunoco.

"With the discounts we have achieved, we believe our fund can do well with $21-a-barrel oil," he adds. "I also think that, when the economy turns around, there is much unused capacity in the energy business that is going to benefit," he says. Vanguard Energy is betting on a world economic recovery. Bandtel stresses there is undercapacity in much of the developing world that diversified oil companies can tap.

"As economies in the developing world start to expand again, all of these companies are going to benefit because they have huge operations there," Bandtel says. This is a theme shared by most other managers in this sector.

"We're looking at a bullish part of the cycle and expecting to do well," says New Era's Ober. "Oil prices in the 20s to low 30s should be a great environment for us." Lead positions in his portfolio recently were Exxon, Ocean Energy and Royal Dutch. Besides big, diversified energy companies, Ober is hedging his bets by throwing in a few consumer cyclicals and industrials that would benefit from low energy prices.

The problem with natural resources funds is one of categorization, which explains why some of them obtained outsized performance last year while most lost money. Not only can't managers agree on what constitutes a common strategy for natural resources investing, others can't agree on what should be included in the category. For example, Morningstar and Value Line disagree on Oppenheimer Real Asset. The former says it is a natural resources entry, while the latter calls it an asset-allocation entry.

Most natural resources funds are not big bets on a war or disastrous economy as much as just an attempt to diversify slightly. Most of these funds, as proven by their performance last year, are not going to obtain outstanding returns in a down year, unless one calls losing less than others outstanding. That is unless one is buying a fund like Oppenheimer Real Asset and is prepared for a rocky ride that will include hitting a homerun when commodity prices or gold prices are rising at a faster pace.

The question an advisor should raise about natural resources funds isn't "Is this all there is?" but "Is this what my clients want?"