ENERGY, natural resources and gold shares can boost investors' portfolios over the next few years if the pundits are proved right. But the sector is notoriously volatile because commodity prices can move fast. Increasing demands for energy and resources, and reduced costs of mining, drilling and exploration through new technology, are expected to make companies mining natural resources and producing energy more profitable. By allocating a small percentage of a growth portfolio to this sector, investors can make sure they do not miss sudden rallies. A small holding of gold, considered by many the investment of last resort, can also act as an insurance policy when all else fails. Private investors can gain leverage on rising prices and insulate against sudden drops, by investing in the shares of companies involved in mining or oil production, for example. There are 14 unit trusts in Hong Kong specialising in this field. Michael Simmonds, assistant director of Schroder Investment Management, which offers the only locally managed energy and commodity fund, said: 'The fund invests in companies which produce energy. If the business is doing a good job, there's no reason why share prices shouldn't improve over time, even if commodity prices go down.' Mr Simmonds is employing a two-pronged strategy to try to reduce risk. One is that the fund is geographically diversified with an almost equal three-way split between Asia, the Americas (including Canada and South America) and Europe-Africa. The other is the balance between energy stocks and utilities such as Huaneng Power, China's largest-quoted electric company. Energy producers tended to benefit from rising inflation and interest rates, and utility shares from low inflation, Mr Simmonds said. The funds' portfolio is about two-thirds in oil and coal producers and one-third utility stocks. Mr Simmonds said commodity funds should account for about five per cent of an investment portfolio, and utility funds about 20 per cent. Since Schroders' fund is a bit of both, he suggested an allocation 'somewhere between those'. But the volatility of commodity funds has been demonstrated by Regent's Global Resources fund, which topped the sector in December last year with 27 per cent growth after its first year, although it now is showing a loss of about two per cent. Dennis Lau, marketing manager at Regent, said the fund suffered from a correction in base metals prices since October last year. He suggested an appropriate holding was 10-15 per cent in a portfolio, but emphasised the resources sector involved higher risk. Of the six gold funds available, two are managed locally by Schroders and Indosuez Asset Management. The Mercury and Guinness Flight funds are managed in London. A market leader in gold unit trusts is Mercury, part of the SG Warburg Group. Its seven-year-old gold and general fund, worth HK$1.11 billion, has become an institution. Managed in London by Julian Baring - no relation to the merchant banking family - it is available in Hong Kong and is denominated in sterling. Seiichi Fukuyama, director of business development at Warburg Asset Management, said gold tended to do very well when other markets did not. Last year the gold and general fund made 23 per cent in US dollar terms after an amazing 300 per cent in 1993. 'Investors can hold this investment like an insurance policy' said Mr Fukuyama, adding that gold should account for only 10 per cent of a portfolio. Mercury's International Gold and General fund is a US dollar-denominated fund based in Jersey. It invests mainly in the original sterling gold and general fund, but also may hold cash, physical gold, and use futures. In December last year the ST Gold and Mining fund was launched as an option for the Selected Trust umbrella fund, based in Luxembourg, which now has 31 sub-funds. Mercury's David Baker in Sydney, said: 'We are stock pickers. We take big positions in companies which are always well researched.' Mr Baker was bullish about the price of gold, which is just below US$390 an ounce. 'Demand exceeds supply and there is a global gold gap. That gap is having to be met by central bank sales or private dishoarding,' Mr Baker said. With sustained demand for the precious metal in Asia and shrinking production, he said 'we are getting used to higher prices'. A recent analysis of the gold price by Salomon Brothers predicted it would average US$400 per ounce this year and $500 in the current cycle. 'When the price moves it can move quickly. It's a volatile sector and you don't need a huge exposure,' Mr Baker said.