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Is this the sector for the true contrarian investor or should you just cut your losses?

29 November 2014

Natural resources funds have had yet another bad year in 2014, so can investors really expect the sector to rebound or should they just cut their losses and look for other opportunities?

By Alex Paget,

Senior Reporter, FE Trustnet

Natural resources funds are right up there as one of the most disliked areas of the market with investors – and it is easy to understand why.

Following outstanding returns during the first decade of this century, funds which concentrate on the shares of commodity-related companies have had an awful time of it since 2011.

Factors such as slowing growth in China, poor company management and falling commodity prices have all been cited as reasons for their huge falls.

Whatever the reasons are, data from FE Analytics shows that an equally weighted portfolio of natural resources funds from the IMA universe has lost more than 30 per cent since the start of 2011.

As a point of comparison, every other IMA sector has delivered a positive return over that time.

Performance of composite portfolio vs index since Jan 2011


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Source: FE Analytics

However, given those losses and as a result of bombed-out valuations, experts within the asset class say that the outlook for commodity funds is now very attractive.

“Resource equities are particularly attractive at present, even taking into account China’s slower growth,” Duncan Goodwin, the head of global resources at Barings, said.

“One of the key reasons for this outlook is that the factors underpinning performance are changing. Resource equity performance has become less dependent on the cyclical nature of commodities, with returns increasingly being driven by improved capital allocation and restructuring within companies.”

“We see that, on this basis, valuations are compelling, with the gap between low market expectations and actual investment potential in the sector having reached attractive levels.”

While most agree that valuations are very low, the big concern for most investors is that they have heard this all before.

Much more disciplined company management teams, tighter supply and low valuations were given as reasons for why the bear market in natural resources would start to reverse in 2014.

In one article last year, Neil Gregson – manager of the JPM Natural Resources fund – told FE Trustnet that valuations of natural resources stocks had never been cheaper and the worst was over for the out-of favour sector.

However, according to FE Analytics, natural resources funds have once again fallen – this time by 2.45 per cent across 2014 – thanks to weaker commodity prices.

The only IMA sector to have delivered a worse return has been UK small-caps.


While the likes of Carmignac Commodities and BlackRock Natural Resources Growth & Income have made money this year, Investec Natural Resources and JPM Natural Resources are in negative territory.

Performance of funds in 2014

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Source: FE Analytics

With that in mind, are investors right to have finally lost patience with the sector or are these funds actually going to bounce back?

Ben Conway, co-manager on the PFS Hawksmoor Distribution and Vanbrugh funds, is one who has been upping his exposure to natural resources funds and while he admits that he and his team have been wrong on the sector in the past, he does think it is different this time around.

“We like commodities because we feel they represent a margin of safety and that’s because valuations are just so low,” Conway said.

“I would caveat by saying we have got our call wrong in the past as they have struggled recently due to very, very sharp falls in commodity prices. However, the thing we like about the sector is that there is a lot of self-help going on.”

“Management teams have been cost-cutting by reducing capex and are being more shareholder friendly. We feel that companies can now generate decent levels of free cash flow even with weaker commodity prices, and the reason for that is because they have been more disciplined.”

Conway admits that the story hasn’t really changed since last year and says investors shouldn’t expect a V-shaped recovery in the natural resources sector.

However, at the same time, the manager says investors are wrong to give up on the asset class.

“I think it was Alastair Mundy who went on record saying gold miners were now as hated as banks were during the depths of the financial crisis. From a contrarian point of view, I think [natural resources funds] tick every single box,” Conway said.

“We are not expecting massive returns over the short term as with commodity prices at such depressed levels that’s got to translate into slightly weaker earnings over the coming months.”

“However, our bull case is that these companies don’t need strongly rising prices to perform well. While we aren’t expecting strong short-term returns, I think if you buy at these levels, in three years’ time they will generate a decent return and level of income.”

Conway’s favoured fund is BlackRock Natural Resources Growth & Income, which is managed by Josh Freedman, Tom Holl, Catherine Raw and Desmond Cheung.

According to FE Analytics, the £17m fund – which has a yield of slightly below 3 per cent – has lost 6.74 per cent since its launch in May 2011.

As a point of comparison, the average IMA natural resources fund has lost 30.16 per cent over that time.

Performance of fund vs composite portfolio since May 2011

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Source: FE Analytics


“We use BlackRock Natural Resources Growth & Income in both of our funds. It’s quite small but has been around for some time now and we have a good relationship with the managers,” he said.

“We like it because it yields just shy of 3 per cent and we think it is a good strategy to get paid while we wait for something to happen in the sector. They allocate to energy, mining and agriculture and we are therefore outsourcing our weightings to them so that they can make the decision of the market they feel is most attractive.”

FE data shows the fund – which also uses derivatives as part of its investment strategy – currently has 38.59 per cent in energy, which represents an overweight position, and 31.62 per cent and 23.67 per cent in agriculture and mining, which are underweights.

Blackrock Natural Resources Growth & Income has an ongoing charges figure (OCF) of 1.05 per cent.


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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.