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Is it time to buy the funds that have lost you money every year since 2010?

02 August 2015

Once a hugely popular and profitable sector, natural resources funds just keep losing money but could be a bottom be approaching?

By Daniel Lanyon,

Senior Reporter, FE Trustnet

Natural resources funds were once popular vehicles among investors looking to gear their portfolios towards the super high growth of emerging markets and provide some diversification away from core equity and bond holdings.

However, a dire period for the broader commodities sector has seen them plummet in value over the past five years and made them a near pariah among fund buyers but with seemingly rock bottom valuations some have questioned if they are now a bargain.

According to FE Analytics, the average open-ended natural resources fund is down a whopping 50 per cent since January 2011 while the MSCI AC World index is up 42 per cent.

Performance of funds versus index since 2011


Source: FE Analytics

By far the worst affected is the £695m JPM Natural Resources fund managed by Neil Gregson, which has lost more than two-thirds of its value over this period.

This includes losses of 29.74 per cent in 2011, 12.68 per cent in 2012, 20 per cent in 2013, 16.55 per cent in 2014 and 22.34 per cent so far this year.

However, over the longer term it has performed strongly, having more than tripled the gain in the MSCI AC World index since 2000.

Performance of fund and index since 2000


Source: FE Analytics

Commodities funds and trusts have gone out fashion due to slowing growth in China – where the bulk of growth in demand for the likes of copper, aluminium and platinum has come from over the last decade, as Russ Koesterich, BlackRock’s global chief investment strategist notes.


“Overall, commodities in general have been weakening—crude oil entered a bear market last week—as global growth and Chinese demand slip,” he said.

In a recent investment note, Capital Economics said sentiment towards commodities as an asset class has rarely, if ever, been more negative.

“This is understandable given the persistent weakness of prices and the headwinds on both the demand and supply side,” Capital Economics said.

“However, we believe that the mood is now excessively bearish. A sustained recovery may have to wait for the markets to adjust to the prospect of higher US interest rates and further dollar strength.”

“Nonetheless, from a contrarian point of view, the current crisis of confidence presents many opportunities. Relative to the consensus, we are particularly positive on the outlook for the prices of (most) industrial and precious metals.”

Aneeka Gupta, analyst at ETF Securities, thinks China is the market to watch for any sign for a turnaround in the fortunes of commodities.

“Chinese manufacturing [has fallen] to a 15-month low and German factory output growth unexpectedly cooled pointing to fresh evidence of waning demand,” she said.

“[However], we believe this week’s decline in the Shanghai composite index to its lowest level since 2007 will propel the Chinese authorities to increase further stimulus which bodes well for industrial and precious metals.”

Koesterich says one of the worst parts of the commodities funds’ investing space – gold miners – have been particular sold-off of late due to pressure from a strongly held belief that US interest rates are poised to rise.

This may appeal to the very contrarian investor, but not all commentators are convinced that the bombed-out stocks are due a rally given the headwinds facing the yellow metal.

“Precious metals have come under additional pressure with the specter of the first Fed tightening in nearly a decade. Gold prices are responding, consistent with historical patterns, to the rise in real interest rates,” Koesterich said.

Mark Tinker, head of AXA Framlington Asia, says gold is starting to looking more interesting because of its heavily out of favour status as a contrarian play, as do other commodities.

“When everyone is looking in one direction, it pays to start paying attention elsewhere. Commodities are really weak, but the sharp fall in gold suggests a capitulation trade – some from China and possibly from high profile hedge funds. Contrarian investors will start to notice this.”

However, JPM Natural Resources manager James Sutton says he is staying underweight gold for the foreseeable future.


“Gold equities are a good portfolio diversifier because they have different performance credentials to other asset classes. [But] the gold price doesn’t tend to do well with an interest rate rise. We have no plans to change our current gold equity allocation to a neutral or overweight position and will definitely stick with it until the first interest rate rise,” he said.

“Up until that point, it’s going to be a volatile period for most asset classes. After the first rate rise, there may be some kind of relief rally for the gold price and gold equities.”

“At present we have 18 per cent invested in gold equities and this position hasn’t really changed for the past two years. We do not invest in physical gold. We’re underweight compared to our benchmark which has 33 per cent in gold equities, so we’re underweight by nearly 15 per cent.”

Despite the underweight he says it is important to be invested in the companies that can weather the current downturn and be in a position to turn around when gold recovers.

“From an equity perspective, we’re sitting tight in those companies that are likely to survive the downturn and will still be around to benefit from higher gold prices in the future,” he added.

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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.