Insight: Can commodity funds rebound?

  • Gain an understanding of what energy and resources managers are investing in
  • Learn about how funds and trusts have performed
  • Understand the challenges facing the sector
Insight: Can commodity funds rebound?

The typical energy and resources fund has performed worse than cash over the past five years. Understandably, this statement will sit uncomfortably with most investors: cash deposit rates have remained at record lows during this period, and on the whole equity markets have been thriving.

The average annual return for energy and resources funds and trusts over the period is 0.6 per cent. To put this into context, when compared with the performance of International Association (IA) sectors, only the Short Term Money Market has performed worse. Even the IA Money Market sector – comprising cash held on account for slightly longer periods – has grown by 0.7 per cent.

A number of factors have contributed to this result. The energy and resources group is, by nature, highly volatile. Commodities such as oil and gas are coming under pressure both economically and politically. But some green shoots may be on the horizon, particularly in the renewables space, where returns have been far healthier.

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Mixed returns

Table 1 shows the top 20 performing energy and resources funds and trusts. The grouping – which is classified as Commodities and Natural Resources by the Association of Investment Companies but not officially recognised in its own right by the IA – is fairly small: it is home to a total of 33 vehicles.

Given the range of commodity exposures able to be accessed by these strategies, it is unsurprising that the grouping has achieved a highly disparate set of returns. The period from 2012 to 2013 is a case in point. The best-performing fund – Guinness Alternative Energy – grew by 80.1 per cent, but worst performer, City Natural Resources High Yield Trust, lost 29.3 per cent.

Differences also lie in whether managers look broadly across all sub-sectors or focus on specific ones. For example, some funds have a sole focus on mining, in materials such as precious metals, whereas others may invest more widely. In short, although energy and resources funds are being placed in the same bucket for analysis, they aim to produce varying outcomes.

The year 2015 marked a rare period of stellar returns – with the average fund growing by 41.7 per cent – but apart than that good results have been scarce for conventional resources portfolios.

If an average return of just 0.6 per cent per annum over five years is a cause for concern, then the picture across 10 years is even bleaker, with the average strategy losing 1.9 per cent each year. Even the best-performing fund in the table over this period – T Rowe Price Global Natural Resources – has only risen by an average of 2.9 per cent annually.

The situation has improved slightly over the past 12 months, on the back of a rise in the price of oil and metals such as copper, but returns still come up short when compared with other sectors. Thus investors may remain unconvinced of the funds’ merits.

Oil slick

Oil prices have played a fundamental role in the fortunes of mainstream energy and resources funds in the past few years. And those avoiding oil and gas companies have fared better.