However, as the credit crunch began to bite and companies struggled to get financing, the demand for commodities around the world saw a dramatic slow-down, as shown in this chart:
Funds
As a traditional sector for investment, many funds within the IMA Unit Trust and OEIC universe have a large weighting in basic materials, a sector which includes mining and energy, and related industries.
In 2008, funds with the highest weightings allocated this way have suffered some of the largest loses of all open ended vehicles.
| Name | % in Basic Materials | Return in 2008 |
| First State - Global Resources | 35.7 | -41.32 |
| JPM - Natural Resources | 33.9 | -52.1 |
| Neptune - Russia & Greater Russia | 46.8 | -59.21 |
| Oceanic - CF Australian Natural Resources | 42.9 | -63.2 |
| Oceanic - CF Global Resources | 50.4 | -47.81 |
| FTSE All Share | -29.93 | |
| FTSE Mining | -54.88 | |
| MSCI The World Index | -18.15 |
However, it was precisely this large weighting in basic materials that led to these funds' excellent returns in the period prior to the collapse of the commodities bubble. For example, in 2007 the First State - Global Resources fund returned 54.87 per cent, while the FTSE All Share returned just 5.32 per cent.
The aggressive nature of these funds is reflected in the 34.58 per cent volatility of the FTSE Mining sector. In contrast, the FTSE All Share has a volatility of 15.45 per cent.
Despite these dramatic falls, investment in the mining sector has produced good long term results. For example, the First State Global Resources fund has returned 74.11 per cent in the five year period to 26 January 2009. During the same period the FTSE All Share returned 12.94 per cent.
Outlook
Despite the global slowdown, there is still demand in the developing world for commodities. China and Brazil, for example, are still seeing their economies grow, albeit at a slower rate than enjoyed previously. Commodity analysts suggest that the result will be a trough in the commodity cycle lasting several quarters rather than years.
Furthermore, as governments around the globe seek to boost their economies, money will be poured into sectors such as infrastructure and automobile, sectors requiring a supply of commodities. As the demand for commodities increases prices will begin to rise.
Beyond this general view of the mining industry there lies a much more complex picture of the outlook for individual commodities. For example, gold helps to safeguard investors and if currencies start to devalue as a result of the fiscal stimulus packages being implemented around the world gold will benefit.
In contrast, Bloomsbury Minerals Economics forecasts that 2009 will be one of the worst years on record for copper but there will be a slow improvement in 2010 followed by a strong recovery in 2011.
The investor’s picture
While most general portfolios will have some allocation to basic materials, a large weighting indicates an aggressive approach on the part of the fund manager. Just as in property, many investors bought into the sector believing that returns would just keep going up, but subsequent events have emphasised the error of such perceived wisdom.
The investor should be aware that while the sector has the potential for outstanding returns there is an inherent level of risk which brings with it the possibility of large losses.
Most analysts agree that the commodity cycle has not reached the bottom of its trough yet, and stocks continue to be extremely volatile. Investors should approach with caution and if they decide to step in should understand that any investment in mining stocks and related industries in the current climate is undertaken for the long term.
The returns enjoyed in the ‘golden decade’ are unlikely to be seen for a very long time yet.