Q&A: Fund Manager David Kiefer
It has been a giddy period for mutual funds that invest in the stocks of energy companies and producers of natural resources. One big winner has been the $1.6 billion Jennison Natural Resources A fund. The fund, which carries a sales charge of up to 5.5 percent, is up 23.3 percent so far this year and 77.2 percent over the past 12 months. This puts it in the top 1 percent of all natural resource funds. U.S. News chatted with portfolio comanager David Kiefer.
With something like 60 percent of the fund in energy stocks and almost another third in materials, it sure doesn't look as if you're betting on a global recession, does it?
You have to keep in mind that this is a natural resources fund, so we don't have a lot of choices. But I am an optimist on commodities. And a lot of that comes from the fact that for 20 years, until three years ago, there was virtually no sustained positive activity in any of these commodity markets--oil, natural gas, gold, silver, copper, nickel, aluminum, platinum. What finally makes them attractive is that we've gotten to the point where world supply and demand are roughly in balance, and economies continue to grow and use more of these commodities.
How much speculative excess is embedded in these rising prices, particularly oil?
That's hard to measure ... but we believe we're in a sustained uptrend for a lot of these commodities. Not that prices will go up 20 percent a year, though.
So, where do you see the price of oil going?
We've been bullish on oil, but I am surprised at the levels that prices have remained at. To be honest, I don't know what the correct price for oil is. But we are out of spare capacity to supply the world, and that is the overriding fundamental factor. ... And in terms of supply, we don't see the likelihood of finding a huge new elephant-size oil field that would change the world supply picture ... unless there's one sitting under the Antarctic. And it would be really expensive to get the oil out of the ground there.
How do you pick stocks in this sector?
When you run a sector fund, you have to focus on the bottom up, and with resource companies, you have to start with the commodity first and get that right. You are looking for commodities that have an improving supply-demand picture and one where the cost of production is rising slower than the price of the commodity. Then you have a rapidly rising revenue line, and you experience expanding margins.
For example?
[Canadian oil sands producer] Suncor Energy was a name that no one had heard of three years ago. ... Their production costs are almost fixed. There is no exploratory risk. They know where their reserves are. So oil prices are rising faster than the cost of production. Another is First Quantum Minerals. They are a first-class copper-mining operation [in Zambia and the Democratic Republic of the Congo] with great attention to costs. ... We have been adding to our metal exposure and trimming our energy weightings since energy has done so well.
What about gold? It's more than just demand from China for jewelry, right?
A huge amount of the annual demand for gold is financial. ... We're seeing the central banks of developing nations showing an interest in buying gold--China, the Middle East, Venezuela. ... For 20 or 30 years, central banks have viewed gold like rotten eggs. And the bears on gold will tell you that the banks can flood the market tomorrow. But with the price of gold rising, maybe they aren't going to want to sell so much gold.
With all the demand China generates for resources, it seems you'd have to be a China analyst, too.
We just want to make sure there is not some meaningful change in China that we should be aware of. But all signs seem to be pointing to an economy that will grow on a sustainable basis for a long period of time. ... There will probably be a correction at some point, but it will be caused by something nobody is forecasting.
This story appears in the May 8, 2006 print edition of U.S. News & World Report.
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