Apr. 3, 2008 (Investor's Business Daily delivered by Newstex) -- Gold funds were the only sector group to advance in the first quarter. They returned 5.22% on average, according to Lipper.
Real estate funds closed the quarter down 1.18% on average. They had to settle for leading sectors in March alone, gaining 3.64%.
REIT funds were the one group to gain ground last month. All others, including gold, suffered setbacks. Gold funds' 9.68% decline was worst among all categories.
Gold's schizoid is showing reflected investor response to recent Federal Reserve Board interest rate cuts, says Tom Winmill, manager of $283 million Midas Fund MIDSX.
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The cuts in December and two in January made many investors -- especially foreigners -- look elsewhere for places to put their money to work, Winmill adds. That hurt the U.S. dollar and U.S. equities. Many investors, Winmill says, fled to gold and gold stocks.
As a result, gold funds led all sectors in both January and February.
But the Fed's March 18 cut of 75 basis points was less than many gold bugs expected, Winmill adds. Gold fell.
"For multisector momentum investors, that disappointment was dominant," Winmill said. "It sparked a rotation out of commodities, including gold, into regular equities."
For Q1 Kinross KGC was one of Winmill's top performers. It gained 20% despite giving back 11% in March. The company produced 1.6 million ounces of gold in 2007. It expects to produce 1.9 million ounces this yea r and 2.5 million ounces in '09.
After cracking $1,000 an ounce in mid-March, the London gold price closed the month at $933.50.
"Kinross' production costs in 2008 should be around $375 per ounce," Winmill said. "As they bring new production online, costs per ounce should decline as they spread expenses. It should go down to $340 an ounce."
Overall, Winmill is bullish. "We see further depreciation in the dollar," he said. "Interest rates will go down more. And we think inflation will go up."
One reason for real estate's strong March move was its low base. "It was sold excessively in 2007," said J. Scott Craig, manager of $590,000 Eaton Vance Real Estate Fund EIREX. Craig helps run $500 million in REIT holdings among his firm's other funds.
The sector's differences from other financial segments also appealed to investors. Compared with other financials, real estate investment trusts offer more transparency, durable cash flows and lower debt-to-asset values, Craig says.
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Self-storage and residential apartment REITs were the top performing Q1 segments. "Weakness in housing hurt those segments less than people expected," Craig said.
Public Storage PSA soared 20% in Q1 and 9% last month.
Regional malls were his strongest segment in March. "When the economy weakens, retailers at big regional malls may want a lower lease but they are even less reluctant to abandon a good location if they don't get a better lease," Craig said.
Craig is guardedly bullish going forward. "I'm confident that 2008 will be better than 2007," he said. "Sadly, that's not saying much."
One encouraging sign: Commercial real estate is not entering the current economic slowdown with a big supply surplus. That contrasts with downturns in the late 1980s and 1990s. "Lack of excess will moderate the depth of a downturn now."
The bellwether tech sector lost 0.57% on average in March, less than most categories. But its 15.78% setback for the quarter beat only the telecom sector's 19.31% plunge.
Kevin Landis, who runs $400 million among six tech funds at Firsthand Capital Management, sees low stock prices this year fueling a sector rally next year.
"Once people start to talk about an economic recovery, people who shopped for tech stocks in 2008 will be happy in 2009," he said.
Consumer goods should play a role, he says. "Global consumers will buy 1.3 billion cell phones this year," he added. "And alternative energy is probably my favorite segment now."
Applied Materials AMAT rose 10% in Q1 and nearly 2% in March.
"It's a semiconductor blue chip with growing exposure to solar manufacturing," Landis said.
Natural resources funds lost 4.53% on average in Q1 and 2.09% in March. They were hurt by fears of an economic slowdown. Sluggish GDP growth in the U.S. hurt less than many investors had expected. "The U.S. isn't as important economically as it used to be," said Daniel Rice, manager of $1.1 billion BlackRock Global Resources Fund.
Energy exploration and production companies were his hottest segment. They got a big boost from the price of natural gas, which rose faster than crude oil's.
His top stock was Clayton Williams Energy. The small Texas producer gushed 68% in Q1 and 39% in March. Investors learned of company rights to a big energy field in Louisiana known as the Haynesville Shale. "This could be the biggest play in company history," Rice said. "And it was pure luck."
Newstex ID: IBD-0001-24220823
Originally published in the April 3, 2008 version of Investor's Business Daily.
Copyright © 2008, Investor's Business Daily, Inc. All rights reserved.
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