NATURAL RESOURCES STOCKS ENERGIZING MUTUAL FUNDS.

Byline: Chet Currier Associated Press 

In the often volatile world of specialized mutual funds, energy is the hot item right now.

Natural resources funds, a category of several dozen funds that concentrate on stocks of oil, gas and other industrial-commodity producers, boast the single biggest gain this year among all fund types.

From New Year's through late October, they racked up an average return of 26.69 percent, according to Lipper Analytical Services Inc., while the average diversified U.S. stock fund was gaining 14.43 percent.

The natural resources group outpaced even the resurgent Latin America funds, which returned just a shade under 24 percent.

``Oil and gas prices are rising,'' says Jay Schabacker, editor of the Mutual Fund Investing newsletter in Potomac, Md., ``and not because of Saddam Hussein's antics.

``We're actually responsible for these rising prices, thanks to our robust U.S. economy,'' Schabacker says. ``With gasoline inventories low and gas usage expected to remain high through the winter, I expect further price increases.''

Natural resource stocks, and the funds that specialize in them, have a longstanding reputation as inflation-linked investments that perform best when the cost of living is rising strongly. That image doesn't fit this year, however, when inflation by most measures has remained subdued.

As the Morningstar Mutual Funds service observes in its latest appraisal of the group: ``Natural resource funds are often viewed as inflation hedges, but their performance is largely dependent on supply-demand factors, which can be affected by economic strength, politics, weather and more.''

Their ability to diverge from other inflation-related investments has been clearly demonstrated in the past six months or so, as Morningstar numbers attest. Over a six-month period through early October, natural resource funds gained more than 9.5 percent while funds investing in precious metals, the archetype of inflation hedges, were falling almost 8.5 percent.

After a brief run past $400 an ounce early this year, the world price of gold has lately languished in the low $380s.

Fund investors looking for ways to play the resurgence in energy stocks can choose among a wide range of possibilities. You can opt for broadly diversified natural resource funds, in which energy may share co-billing with metals, forest products and so forth.

At the same time, there are more than a half dozen energy-specific funds, including offerings from each of the leading groups that sponsor sector funds - Fidelity, Vanguard and Invesco.

You should be aware going in, though, that just about any of these funds can be volatile. The more focused its managers are on a specific type of stock, the more extreme that volatility may be.

From the early 1980s, after a couple of ``energy crises'' in this country, through the mid-1990s, energy investments repeatedly disappointed their followers, both short-term speculators and patient long-term investors.

In the 1995 bull market, Morningstar reports natural resource funds had a rise of 18.89 percent that was barely half the gain recorded by Standard & Poor's 500-stock composite index.

Wrote Deborah Weiss, a Morningstar analyst, in the firm's last update on the group: ``While most energy fund managers see a bright future for oil and natural gas companies, they admit that these stocks will remain volatile.

``Invariably, as commodity prices change, investor sentiment about these stocks shifts as well.''

Before you plunk some money in a specialized energy fund, you might check to see whether a diversified stock fund you own has a significant part of its portfolio already devoted to this area.

Many ``value'' and equity-income fund managers, in particular, have been drawn in recent years to the big, established energy companies by their relatively high dividend yields and their long period of disfavor on Wall Street.

In cases like that, you may consider that the managers have done their job by putting your money in energy stocks before the idea occurred to you.