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.

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