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Emma Wall: Hello and welcome to the Morningstar series, "Ask the Expert." I'm Emma Wall and I'm joined today by fund analyst for Morningstar, Fatima Khizou, to talk about commodities.
Hi, Fatima.
Fatima Khizou: Hi, Emma.
Wall: So, if you told investors a year ago that after the torrid time oil price it had, it would halve again over the next year, they probably wouldn't have believed you; but it happened. In fact, in general, it was a bad place to be in commodities, energy, oil stocks over the last couple of years, wasn't it?
Khizou: Yes, it was. Commodity-related investments have undoubtedly been an unloved and challenged area for the last few years. It's certainly understandable that there is a degree of disappointment amongst investors given the sharp decline and weakness over the last five years. In each of the major commodity sub-sectors with energy being the latest one after agriculture in 2013 and base metal in 2011.
Oil prices have actually tumbled by almost 75% in the last 18 months as a result of the decision taken by OPEC in November 2014 to switch from a price to a market share strategy. And this downward trend is showing no sign of ending and Saudi and other players are holding firm on their strategy. But it's not all gloomy. We've seen more recently some areas of the commodity market surging like gold particularly.
Wall: About time too, because gold, of course, is the sort of thing that does well when there is doom and gloom about and there has been doom and gloom about for quite some time from China, from the Middle East and it seems to take investors a while to sort of do that flight to safety which they have done in the past. But finally, they are here and gold has gone up in the past week, hasn't it?
Khizou: Yes, it has. Finally, as you said, it tends to work well when there is a lot of economic concern and last year even during the Greek crisis that hasn't been the case. And so far this year gold equities have enjoyed a strong rally on the back of economic growth concerns but also weaker dollar which tends to help in this space.
Wall: If investors are feeling bold, if they think they can call the bottom of the energy market, there is a fund which they should consider, shouldn't they, for a niche part of their portfolio?
Khizou: There is one which is Guinness Global Energy which we rate here at Morningstar Silver and it's run by an outstanding team of three managers, Will Riley, Jonathan Waghorn, and the highly-experienced Tim Guinness, who has more than three decades of industry experience. The long-term track record here is strong.
Last year has been weaker given the environment and the key here in this space, but across all the commodity complex is a focus on quality, on companies with stronger balance sheets and in terms of energy, companies that are able to survive in this low oil price environment but also eventually able also to capture the upside.
Wall: When it comes.
Khizou: When it comes. It will one day.
Wall: And what about investors that want a slightly broader basket approach?
Khizou: One that is a representative of the entire commodity complex including energy is First State Global Resources. Here again, the fund is run by a well-resourced team of high calibre individuals led by a highly experienced manager Joanne Warner. The broad investment approach has been consistent since the fund was launched and the results over time have been also solid. In our view, this is a quality way to invest in the resources space.
Wall: Of course, it is worth mentioning, I said the word niche earlier. These are of course only for investors who have a well-diversified portfolio already and this is a satellite player. This is not for the core of your portfolio, is it?
Khizou: Yeah, we always emphasise that this type of fund should only form a small part of the overall portfolio of an investor.
Wall: Fatima, thank you very much.
Khizou: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
