Commodity-related investments have delivered mixed results in 2017, failing to match the gains achieved in 2016. The Commodities-Broad Basket Morningstar category underperformed the broader equity and fixed income markets. It is also worth noting that all the gains were generated in the second half of the year.
Indeed, after a strong start in January, many commodities lost momentum, reaching low bottom prices for the year during the second quarter. A slight deterioration in macroeconomic data, high level of inventories, China’s tightening of credit conditions, have all contributed to a negative sentiment for the sector.
Among the key commodity sub-sectors, energy posted the largest loss, with the MSCI World/Energy index falling by nearly 10% over the first six months. A sharp rise in the US rig count prompted a growth in production, which the OPEC production cuts failed to offset, thus delaying the oil market rebalancing.
The oil price continued to be volatile and was weaker overall during that period, as many investors became sceptical about the willingness of OPEC’s members to comply with the agreed deal.
Returns in the mining sector also eased back in the first half of the year, predominately driven by a fall in the iron ore price after reaching record highs in 2016. On the precious metals front, results were more positive. Gold equities continued to deliver positive returns throughout the year supported, in part, by geopolitical concerns, although prices remain well below the remarkable levels witnessed a year ago.
Largest Natural Resources Funds
The largest funds are run by managers with a great deal of experience in the sector.
The BGF World Mining Fund holds a Morningstar Analyst Rating of Silver and has been managed by Evy Hambro since its launch in 1997. Hambro is a seasoned mining investor who is supported by co-manager, Olivia Markham, and a well-resourced team of experienced portfolio managers and analysts.
The managers aim to deliver steady outperformance through a risk-aware approach that combines a rigorous assessment of commodity price trends over the long term and company analysis. The top-down approach aims to forecast the price trend for the underlying commodities, while the bottom-up analysis focuses on lower-cost, higher quality producers where they believe equity valuations underestimate the longer-term earnings prospects.
The portfolio is constructed from the bottom up, with the 10 largest holdings typically accounting for more than 50% of the assets. Diversified companies dominate the portfolio, followed by gold and copper producers. This offering continues to dominate the mining space in terms of AUM despite the outflows experienced.
The JPM Global Natural Resources fund has a Morningstar Analyst Rating of Bronze and is run by Neil Gregson who became lead manager in February 2012. He is an experienced investor and is supported on this offering by co-manager Chris Korpan and a well-resourced team of industry specialists and regional analysts. The team aims to add value through material investments in small-cap stocks from pre-production stage/discovery to reserve definition, using a bottom-up analysis that focuses on misvalued companies. The portfolio is diversified across regions and four key subsectors: energy; gold and precious metals; base metals; and diversified mining.
Top Performing Emerging Market Funds
Top performers include funds with a narrower mandate. The Pictet Timber fund is managed by Gabriel Micheli and Christoph Butz, a former forestry engineer, who is the sustainability expert and is also tasked with forestry valuation work. The investment approach combines an assessment of industry dynamics, identifying key themes, and company analysis.
The managers will typically invest the bulk of the portfolio in “pure timber” companies where they perceive long-term opportunity based upon the supply and demand dynamics for wood, with added value from additional investments in the timber value chain, which has a range of different cyclical drivers.
While the duo typically takes a long-term view with holdings, they are also willing to take advantage of short-term opportunities and have shown their ability through time to add value by allocating between the sub-sectors. Returns are ahead of the S&P Global Timber and Forestry index since the fund’s inception in September 2008.
The Aberdeen Global World Resources Fund is also amongst the strongest performers but has a broader mandate. This strategy is managed using a team-based approach, following a fundamental, bottom-up equity investment style, which is characterised by intensive, first-hand research and disciplined company evaluation with the aim of investing across the various sub-sectors of the commodity complex.
The portfolio is diversified across a wide range of producers including chemical and packaging companies and as such offers an unusually broad approach to resources. The resulting fund is concentrated with around 30 holdings and the top 10 picks have generally accounted for roughly 50% of the assets.
A version of this article appeared in International Adviser magazine
