13th March 2014
In the days when investors were still in love with China and the commodity super cycle on a roll, natural resources and commodities funds were hot. In the three years to the end of 2009, any fund that prioritised commodity mining or exploration companies shot to the top of the league tables.
Since those giddy days, natural resources companies have, by and large, slumped. The bottom of the specialist sector has become a graveyard for those the types of funds, many of which have slid more than 50% from their peak. The question for investors is whether these funds are likely to revive at a time when global growth is strengthening, but China has lost momentum. Investment journalist Cherry Reynard examines the issues.
Range of fund strategies?
Active natural resources and commodities funds tend to fall into two main camps: Those that are focused on specialist areas, such as gold and gold mining companies, including a sprinkling of other precious metals, or energy; and those that take a more generalist approach, investing in mining stocks across a variety of commodity types.
Those that focus on gold-related companies, will invest in gold mining companies and their associated service companies. In theory, these companies should be able to add value over and above the gold price, because there are lots of different variables that can determine the price of a gold company – the success of management and cost control, for example. Energy funds are a play on the structural growth in demand for energy and may invest in conventional energy groups as well as wind or solar groups.
There are also a number of agricultural funds, which invest in a diversity of agricultural companies and will tend to provide a more consistent return than those focused on just one or two commodities.
More generalist funds would include funds such as JPM Natural Resources or M&G Global Basics. These will aim to provide exposure to a variety of commodities, including any or all of the above, and should be able to provide a smoother return – different commodities will be in favour at different points in the economic cycle and these funds should be able to adjust their exposure.
Another option for commodity-hungry investors is to buy a country-specialist fund offering exposure to commodity-rich countries.
For example, Russian funds will be beneficiaries of rising oil and gas prices. Brazil funds may also do well in an environment where commodity prices are buoyant.
Commodities investment also lends itself to passive funds. There are a vast number of exchange traded products focusing on every major commodity. Some will also offer exposure to a basket of commodities.
In general, most commodities focused funds are found in the specialist sector, though some – such as M&G Global Basics – will sit in the global sector.
Recent performance has been horrible. Prices of natural resources, and the funds associated with them, were over-inflated and have seen dramatic falls. At the bottom of the heap have been gold funds, particularly those focused on smaller gold companies, such as the SF Webb Capital Smaller Companies Gold or MFM Junior Gold fund. These two funds are down 82.1% and 74.4% over the past three years. The gold price itself has fallen from highs of over $1800 per ounce in 2011, to lows of around $1200. It has, however, recovered some ground since the start of the year and is now back to $1,350.
More generalist natural resources funds have fared less badly, but are still significantly lower than three years ago. The high profile funds of JPM Natural Resources and M&G Global Basics are down 45.2% and 5% respectively. Performance was so weak on the Global Basics fund relative to its sector that manager Graham French left the fund, which is now run by Randeep Somel. In general, the best performing funds have been those focused on agriculture, which have seen a small positive performance in some cases.
Some fund of fund managers have been tentatively buying back into natural resources and relative performance has been better since the start of 2014. With mining companies now looking cheap relative to the wider market, some believe it could it be a turning point for these funds.
When do these funds perform well or badly?
Commodities are generally seen as a bull market phenomenon. When economic growth is buoyant, there is greater demand for commodities, which in turn pushes up prices. However, commodities growth is often related to industrial, rather than consumer demand, which tends to come later in the business cycle. The current climate, where business investment is improving, should be an ideal environment for commodities, but there are still significant questions over the influence of China. For many years, Chinese growth supported commodities prices, but as that growth slows, and China moves away from infrastructure development and towards consumer spending, demand for commodities is likely to be structurally slower. This is certainly reflected in current market prices, but no-one can be quite sure how much.
How much of a portfolio for low/mid/high risk investor?
Commodities are not a necessity in any investment portfolio. Investors are already likely to have some exposure through a generalist UK equity fund because miners are an important part of the UK stock market. However, a commodities fund can add some punch to a portfolio in a buoyant economic environment, or it can be a way to play structural long-term trends, such as the rise in energy demand, or emerging market development.
Top 10 by performance (3 year – %) – Commodities-focused funds
Pictet Water 34.7
Pictet Timber 17.7
Pictet Clean Energy 7.9
Allianz Global Agricultural Trends 3.7
Sarasin AgriSar 2.9
BlackRock Global Funds New Energy 2.2
BlackRock Global Funds World Agriculture 2.0
Baring Global Agriculture 1.8
Pictet Agriculture 1.7
MFS Meridian Global Energy 0.0
Questions for investors to ask
Am I willing to tolerate high volatility?
Do I simply want exposure to commodities prices, or would I rather invest in companies?
What do I consider to be the major trends of the future? For example, energy or agriculture?
Do I want a specialist or a generalist fund?
The views of investment experts and the funds they like
David Coombs, head of multi-asset, Rathbone Unit trust managers
“We like the mining sector. There is a strong self-help story there. It is a different story to the commodities one, where prices could go on falling.”
BlackRock World Mining Trust
Marcus Brookes, head of multi-manager at Cazenove Capital
The mining sector has de-rated significantly over the past two years and is now very cheap. Management have changed and instead of excessive capital spending, have started to pay more cash to shareholders. We have around 1% of our Diversity fund in natural resources funds
JPM Natural Resources
BlackRock Gold & General