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Being a commodities investor is a volatile game; in recent years the ride has been as bumpy as those three magi’s camelback trek doubtless was.
In the decade to 2007 commodities benefitted from a fantastic bull run, fuelled by emerging market demand. Private investors clambered to get a piece of the action, buying up commodity ETFs and natural resources funds from the likes of JP Morgan and BlackRock.
But the tables turned when the global recession forced construction to halt across the emerging world. The S&P Goldman Sachs Commodities Index fell 70% in 2008, bottoming out in February 2009 and moving sideways until June this year, when significant falls in the oil price sent the entire index plummeting.
Shale oil and gas discoveries in the US have significantly boosted global supply, forcing prices down and demand has dried up as manufacturing activity across the world, most particularly in China, Asia, Japan and Europe slowed down.
Director of Manager Research for Morningstar Jeremy Beckwith said that though service sector activity has held up better than manufacturing since the summer, manufacturing is generally a high consumer of oil as a key cost of manufacturing and in transporting the goods from the place of production to the place of consumption.
With all this bad news about is it time to give up on the asset class? Barings Head of Global Resources Duncan Goodwin seems to think so – in a bold move, the fund manager holds no direct exposure to the commodities in his sector, preferring instead to invest solely in equities related to natural resources.
“It is impossible to call the oil price right now,” said Goodwin. “It could go to $50 a barrel or $100, and iron ore is all over the place. Given that variability, how can I make a prediction about the outlook for commodities? Equities are easier to understand and in these conditions I think offer greater opportunities for positive returns.”
Goodwin has overhauled the Global Resources Fund since he joined Barings a year ago. Last year the portfolio was almost entirely metals mining focussed, now Goodwin has added companies involved in industries such as chemicals, construction, packaging and forestry – stretching the natural resources mandate to broaden the fund.
Interestingly, he does not invest in BHP Billiton (BLT) or Shell (RDSB), citing overexposure to the dodgy oil price and concerns about the sustainability of the dividend.
The best performing funds in the sector over three years does include BHP however. T.Rowe Price Global Natural Resources Equity fund has the stock as its largest holding, and manager Shawn Driscoll takes a similar equity-only approach to the Barings fund.
While it is difficult to call the bottom of the market, price dips do create buying opportunities for traders, and an experienced manger in this sector will have weathered other such storms.
BGF World Mining fund has a Morningstar Analyst Rating of Gold and has been managed by Evy Hambro since its launch in 1997.
“Hambro has developed outstanding expertise and knowledge in his field and has built one of the best resources teams,” said Morningstar analyst Fatima Khizou.
“The management team seek to identify, through a rigorous assessment of commodities prices, established, high quality companies that they believe are undervalued by the market. The offering has attracted a large amount of inflows over the past decade.”
