Oppenheimer Real Asset offers a novel way to invest in commodities.

In the world of mutual funds, you can't get a purer play on commodity prices than Oppenheimer Real Asset. As its name suggests, the fund tries to profit from the fluctuation in prices of things you can see, touch and feel, such as natural gas, crude oil, metals, wheat and livestock.

But unlike most natural resource fund managers, who invest in stocks of companies involved in the production of those commodities, Kevin Baum skips the equity middleman by investing in commodity-linked derivative instruments whose prices fluctuate in line with changes in the value of their underlying "real asset." By doing so, he removes any whiff of stock market influence and makes it possible for a mutual fund, which can't invest in hard assets directly, to hitch a ride on commodity price fluctuations.

The strategy means that Oppenheimer Real Asset marches to a different beat than both natural resource equity funds and the overall stock market. "The returns of natural resource funds are swayed by everything from corporate management and governance issues to the overall direction of the stock market," says Baum. "Their correlation with the S&P 500 Index is stronger than their correlation with the prices of the commodities their portfolio companies produce. So they are really more of a hybrid stock and commodity investment than a true commodity play."

The disappointing performance of energy funds in 2002, a year when oil prices skyrocketed, illustrates Baum's point. According to Morningstar, the average natural resource fund ended 2002 about flat for the year-far better than the 2% drop for the S&P 500 Index, but still disappointing given the enormous surge in energy prices. (For more information on the recent performance of energy funds, see the article "Energy Funds Fail To Surge" in the April 2003 issue of Financial Advisor.) By contrast, Oppenheimer Real Asset Fund rose 27.4% for the year, thanks to its heavy exposure to the energy sector, and a strategy that allows it to profit directly from rising energy prices.

Despite the unique ultra-low stock market correlation of pure commodity plays, the mutual fund industry seems to be keeping its distance from them. Only one other mutual fund, PIMCO Commodity Real Return Strategy, focuses on commodity-linked derivatives rather than stocks. That fund, launched in June 2002, is much younger than six-year-old Real Asset.

But to the 32-year-old Baum, commodities represent both an active, vibrant market and a way of life. Growing up in Texas, he became familiar with those markets through his family's oil and gas production and livestock businesses. After graduating with a degree in finance from Texas Tech, he joined Oppenheimer in 1993 and has been a trader for Real Asset since 1997. He has managed the commodities side of the fund since 1999.

With the enormous price fluctuation of energy and other commodities, both Baum and the fund's shareholders have had a wild ride that makes stock market swings look tame by comparison. In 1998, its first full year of operation, the fund's net asset value plunged 44.9%. It rose 36.8% in 1999, and leaped another 44.4% in 2000. In 2001, it was off 31.4%. During the first quarter of this year, the fund rose 9 % in January and another 12 % in February, but flopped 14 % in March.

And while the fund and the corresponding commodity derivatives in which it invests in have little or no correlation to the stock market-the fund has a beta of just .03-they do not move in the opposite direction each and every year. In 1999, for example, both the fund and the overall stock market turned in stellar returns. In 2001, a year in which the S&P 500 Index fell 11.8 %, the fund tumbled almost three times as much.

Real Asset's returns and gyrations depend heavily on the direction of its benchmark, the Goldman Sachs Commodity Index (GSCI), a broad barometer of commodity prices throughout the world. The weighting of each commodity within the index depends on its average production over the last previous five years, and is proportional to the amount of that commodity flowing through the world economy. Its 26 commodities include six energy products, nine metals, and 11 agricultural products.

Because long futures contracts don't require a huge cash outlay, about two-thirds of the fund's assets are invested in high-quality, short-term fixed-income securities, including mortgage-backed bonds and U.S. government securities. These investments help ensure liquidity and provide some income, but have only a minor influence on overall portfolio returns. The other one-third of the fund, invested in commodity instruments, creates a 100%, dollar-for-dollar exposure to commodities.