Energy drive
Energy equities, which are an important part of the commodity sector, dominated headlines this year. The price of oil, which started its downward trend in June 2014, fell to multi-year lows in January 2016 before recovering on the back of the production freeze announced by Opec in February.
Several elements on both the demand and supply fronts have contributed to the recovery of the sector this year and subsequently to the rebalancing process. The Saudi market share strategy and laissez-faire stance has led to a decline in the US rig count. US oil production has significantly declined compared with the levels seen in 2015.
Similarly, the low oil price has put pressure on other non-Opec producers, reflecting lower investment in projects. Moreover, supply disruptions in Canada and Nigeria have been a catalyst in the recovery in price.
A recent announcement made in Algiers by Opec to cut production provided a further boost to the oil price and was a marked shift in Opec policy.
Investors have also been encouraged by demand growth, driven particularly by the US gasoline demand and Chinese imports. These developments have driven the oil price up and year to date the energy sector has delivered returns above 16% as represented by the MSCI World/Energy index.
Many managers and commentators believe the oil price will continue to be volatile going forward but will move on an upward trajectory as the global oil supply/demand balance further tightens.
Resources rally
Resources-related stocks have certainly enjoyed a strong rally thus far. Supply/demand fundamentals and improvements in mining companies’ financial strength have led many to believe this positive trend will continue.
From an asset allocation perspective, the commodity space has been significantly underweight during the past few years and while we have seen substantial investment demand in some segments, many investors continue to maintain a cautious stance towards the sector.
Such prudence is not surprising given the sharp losses and disillusionment experienced in recent years.
Investors can access the sector through mandates that invest across all the main sub-sectors of the commodity spectrum, specifically energy, base metals, precious metals and agriculture, or through offerings with narrower focus, such as energy.
Funds to watch – 3-yr performance
The T Rowe Price Global Natural Resources Equity Fund is among the strongest performers over three years and is currently run by Shawn Driscoll, who joined the group in 2006.
The investment approach combines assessment of the commodity cycle, industry valuations and company fundamentals. The resulting portfolio is an all-cap offering, diversified across the commodity spectrum. This approach has delivered attractive returns over the long term despite some shorter-term volatility.
The Oak Tree Junior Mining and Exploration Fund offers exposure to companies devoted to the exploration and/or mining of precious metals and base metals. The fund has an emphasis on smaller companies and investments are selected based on the fundamental outlook, with attention paid to the potential for prospecting.
The BGF Natural Resources Growth and Income Fund was launched in April 2011 and seeks above-average income from its investments. The proposition is run by a three-man management team with expertise in key commodity sub-sectors: mining, energy and agriculture. The team operates a disciplined investment process that combines commodity analysis and forecasts with detailed bottom-up research.
Funds to watch – newcomers
The Van Eck – Global Hard Assets Ucits fund offers a broad approach to resources, investing across a wide range of companies dependent either directly or indirectly on commodities.
The fund is run by a 13-strong investment team that is among the industry’s largest. Companies are selected predominately through a detailed bottom-up research analysis.
The Henderson Horizon Global Natural Resources Fund was launched in July 2014 and is managed by David Whitten, Clive Landale and Darko Kuzmanovic, who operate a disciplined investment process that combines top-down and bottom-up analysis with the aim of identifying the most attractive, high quality and liquid opportunities across the commodity spectrum.
This fund offers investors broad exposure to the natural resources complex and, unlike other funds within the sector, enables them to gain exposure to the agriculture sub-sector.
Funds to watch – assets under management
The BGF World Mining Fund has a Morningstar Analyst Rating of Silver and has been managed by Evy Hambro since launch in 1997. Through a rigorous assessment of long-term commodity price trends and company analysis, the management team seeks to identify established, high-quality companies they believe are undervalued by the market.
The offering continues to dominate the mining space despite the outflows experienced during the past five years.
The Silver-rated First State Global Resources Fund is run by one of the most well-resourced and experienced commodity teams in the space, led by experienced manager Joanne Warner. The team takes a long-term approach and focuses on firms with strong balance sheets and high-quality reserves.
The quality and lower risk approach is an attractive way to get exposure to the sector.The JPM Global Natural Resources Fund holds a Morningstar Analyst Rating of Bronze and is run by Neil Gregson, who became lead manager in February 2012.
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 fund has benefited from its emphasis on riskier small companies at times.
