The struggles witnessed within the commodity sector since 2013 will not be news to investors, seasoned or otherwise, but as prices begin to level, are fund selectors turning attention back towards what could be a value opportunity?
Commodity stocks, and the funds that invest in them, would have been tough holdings in the past few years for even the bravest of value investors. Over three and five years, few funds have managed to protect investors’ capital, such was the extent of the fall in prices.
However, stabilising commodity prices have helped solidify expectations of rising growth and inflation globally, especially since the second half of 2016. Indeed, many resources have soared. Despite a recent slump, oil is trading 62 per cent higher than its January 2016 low.
Similarly, while the MSCI World Commodity Producers index lost 35 per cent in the 18 months to January 2016, it has risen 23 per cent in the 18 months since. The more sensitive Bloomberg Commodity index is up 6 per cent over the past one-and-a-half years.
The outlook is changing for all of the four main commodity sectors: namely energy, industrial metals, precious metals and agriculture.
While the situation around oil and its shale gas rivals are well documented, industrial metals are benefiting from an increase in confidence, particularly among emerging economies. The price of cobalt, for example, has risen 85 per cent year to date.
Investors also seem to have turned more positive on agriculture, according to Capital Economics chief commodities economist Caroline Bain, who notes there have been upward price movements for both wheat and corn.
David Stubbs, a global market strategist at JPMorgan Asset Management, says the effect of the commodity slump that hit portfolios should largely be behind investors, allowing some room to re-enter the market.
However, Mr Stubbs warns that prices will not rise to their pre-slump levels. Investors expecting to see the returns witnessed before could be misguided.
“Prices are likely to be range-bound for years as materially lower prices should induce rapid supply reductions, while technological changes and spare capacity mean any price increases will be capped quickly,” he explains.
“Many companies continue to struggle with the ramifications of the huge price declines witnessed since 2011, while others are better positioned to thrive in this low-price era. In this environment there should be greater potential for driving returns through stock selection, which may point investors towards specialist natural resources managers.”
Investing in commodities is one space where fund buyers have been more open to using the ETF market. Increases in the prices of commodities are quickly factored into the share price of associated stocks, thus cheaper passive holdings via a commodity-targeted index have grown in popularity.
Some $178m (£138m) has gone into industrial metals ETF products year to date, while $136m has flown into those focused on agriculture, according to ETF Securities.
While this is dwarfed by the $550m put into global equity products, positive flows are returning, a sentiment potentially benefiting commodity fund managers of all stripes.
THE PICKS
T Rowe Price Global Natural Resources Equity
This $327m (£254m) Sicav – an onshore version was launched in March 2017 – has been managed by Shawn Driscoll since 2013. The strategy takes a concentrated sector approach, with at least 65 per cent in oil and gas or basic material stocks over the past three years. In addition, its exposure to industrial stocks has ranged between 12 and 20 per cent. The fund has maintained positive returns over five years, returning 20 per cent since July 2012, in line with its MSCI World Select Natural Resources benchmark.
City Natural Resources High Yield Trust
Managed by Ian Francis, Keith Watson and Robert Crayfourd, this £122m investment trust focuses on metals and mining firms, with 16 per cent held in gold and 11 per cent in zinc. Oil and gas stocks tend to be a lesser focus at 9 per cent. The trust currently trades on a discount of 14.4 per cent, lower than its sector average, but fortunes have begun changing with positive returns over one year of 21 per cent. This is below its benchmark, but the vehicle has a yield of 5 per cent.
EDITOR’S PICK
BlackRock Natural Resources Growth & Income
This £50m strategy is run by Tom Holl, Skye Macpherson and Alistair Bishop, who are all members of BlackRock’s natural resources team. Mr Holl also manages the firm’s popular Gold & General fund and its commodities-focused investment trust. The strategy, which yields 2.7 per cent, has done well in adverse circumstances. It focuses on basic material stocks and those involved in agriculture to derive returns – with no exposure to oil and gas in the past three years. Over three and five years the fund returned 5 and 16 per cent, respectively.
