Some Funds' Agricultural Harvests Have Been Bountiful

The credit crunch and fear of an economic slowdown have wreaked havoc and infected various corners of the global market. But one area of the market has blossomed despite harsh conditions, and that is agriculture. Surging oil prices that have increased investment in bio-fuels, rising demand from developing markets, and performance-chasing commodities speculators have pushed crop prices near record highs and helped agriculture industry stocks plow ahead.

Companies ranging from fertilizer producers to farm equipment manufacturers have been reaping the rewards of today's boom. For example, the world's largest potash exporter Canpotex, which is made up of fertilizer producers Potash Corp. (NYSE:POT - News), Mosaic (NYSE:MOS - News), and Agrium (NYSE:AGU - News), announced in mid-April that it will ship one million metric tons of the substance at $576 per metric ton--a $400 per metric ton increase from the 2007 contract price--to Chinese fertilizer importer Sinofert Holdings Limited. With the supply-and-demand balance strongly tilting in their favor, share prices of Potash, Mosaic, and Agrium have more than doubled since the beginning of 2007, whereas the S&P 500 Index has stayed flat. Triple-digit gains haven't been restricted to the fertilizer companies either. Seed producer Monsanto (NYSE:MON - News), for example, has experienced a strong run as well, thanks in part to its dominance in the expensive biotech seed market.

So how has the agricultural boom affected mutual funds? To find out, we screened for funds with the largest total stake in agriculture, agriculture machinery, and agrochemical stocks, as well as in fertilizer giants Potash, Mosaic, and CF Industries (NYSE:CF - News), which fall in the chemicals or mining industries. Not surprisingly, the two funds with the largest bets are sector-specific offerings, Fidelity Select Chemicals (NASDAQ:FSCHX - News) and ICON Materials (NASDAQ:ICBMX - News), which have 37% and 33% of assets in agriculture-oriented stocks, respectively. These funds, which fall in our mid-cap value category, have been among the group's best performers over trailing one-, three, and five-year periods.

To make things more interesting, we narrowed the list down to 10 diversified funds, which are listed in the following table.

Click here to see the table. http://news.morningstar.com/articlenet/article.aspx?id=239969

Plowing the Same Field
These 10 funds are similar in other ways. They're all growth-oriented funds. As agricultural stocks aren't a bargain these days, it's hardly surprising value funds didn't make the list. Most of the funds also are very aggressive. The momentum-focused Direxion HCM Freedom (NASDAQ:HCMFX - News) is the most assertive. The portfolios also are concentrated. With the exception of Fidelity Independence (NASDAQ:FDFFX - News), all of them have fewer than 65 holdings and a lot of assets stashed in their top 10 holdings--which almost always include Potash and Monsanto.

With concentrated bets on agricultural highfliers, it's no wonder six of the 10 funds land at or near the top of their categories for the year to date and one-year period. Agricultural winners couldn't offset sour picks in other industries at a few of the funds, though. For example, Bridgeway Aggressive Investors 1 (NASDAQ:BRAGX - News) and 2 (NASDAQ:BRAIX - News) have suffered from their larger-than-average health-care stakes so far this year, but their one-year returns remain strong. The majority of these funds also have rewarded shareholders over the long haul. With the exception of Shepherd Large Cap Growth (NASDAQ:DOIGX - News), Bridgeway Aggressive Investors 2, and Direxion HCM Freedom (the latter two funds lack a 10-year record), these funds all rank in the top 5% of their category over the 10-year period. Agriculture bets have certainly boosted long-term results, but the funds' returns were strong before the recent boom, suggesting they're not a one-trick pony.

"Miracle-Gro" Funds
We think highly of a number of these funds and their managers. Manager John Montgomery and his team at Bridgeway Aggressive Investors 1 and 2 use a quant-oriented, all-cap approach. And they've done a great job tweaking their quant models to make sure the funds stay competitive. CGM Focus (NASDAQ:CGMFX - News) and Quaker Strategic Growth (NASDAQ:QUAGX - News) are run by skilled managers who aren't shy about making bold asset-allocation calls. We like Janus funds' new manager Ron Sachs and his approach, but are uneasy about Janus' high investment-personnel turnover. Those seeking to ride the agricultural boom should start by taking a look at Bridgeway Aggressive Investors 2 (its sibling is closed to new investors), CGM, or Quaker. We offer a few words of caution, though. Agricultural stocks have already experienced a tremendous multiyear run, pushing their valuations higher, and there's a risk that there may not be much more upside--or perhaps more downside than upside--from here. So if you're chasing short-term performance you could be disappointed. A look at investor returns, which take investor purchases and sales into account, shows that Bridgeway and Quaker's shareholders have missed out on some gains due to untimely shifts in and out of the funds. Also, these funds, thanks in part to their successful agriculture holdings, have potential capital gain exposures ranging from 17% to 22% of assets. Investors may want to limit their investments to tax-deferred accounts to avoid paying taxes on potential distributions. Finally, given these funds' concentrated bets, they're best used as part of a diversified fund portfolio.