October 21, 2021

A Curate’s Egg is Born

by Dewi John.

Dewi John uses the Lipper Leaders scoring system to analyse the best-performing funds in the IA Commodities and Natural Resources sector.

 

In September, we welcomed a squalling newborn—the Investment Association’s Commodities and Natural Resources sector.

Not that the funds themselves are new—one in our top 10 has been running since before England won the World Cup—but the 21 funds in this sector have been hived off from pre-existing ones. This now gives them a distinct identity, as opposed to languishing in the limbo of the Specialist sector.

These funds are far from being a uniform bunch, however—they run from the highly sustainable Alternative Energy to the oil, gas, and coal-laden Natural Resources—in Refinitiv Lipper’s more granular classification system. Along the way, Energy, Materials, Water, Agribusiness, and Gold & Precious Metals are also covered.

So, a veritable smorgasbord.

It’s arguably and opportune time for this repackaging, as the inclusion of exchange-traded funds (ETFs) into the IA universe has expanded this area of the market, with eight of these funds being ETFs. What’s more, various commodity-exposed sectors are attracting assets and delivering returns—not least, as we’ll see, alternative energy—due to the growing importance of the transition to a sustainable economy.

Indeed, the three top performers over three years are all alternative energy funds. But it’s been a volatile year for them. For example, the top performer (and also the world’s largest alternative energy ETF), the iShares Global Clean Energy UCITS ETF USD, more than doubled in value between September 2020 and early January, but has since lost about 30% of that value. So, despite its strong performance over three, and even one, years, it has a 1 (the lowest possible) Lipper Leaders score for capital preservation.

 

Cursed by Good Fortune

The fund has been cursed by its own popularity over this year. The index it tracks was originally composed of 30 stocks, increased in April to more than 80, to accommodate large inflows. This change will reduce volatility, but also dilutes exposure, as not all the additions are “pure play” alternative energy. Given the amount of money chasing assets in a still nascent sector, it’s hard to see how this isn’t an inevitable trade off, at least for now.

If you’re looking to invest in this area, it’s worth taking a closer look at the portfolio to see how theme is accessed.

While alternative energy is strategically important, it’s also volatile. Over the long term, the case for it is strong—inescapable, even. But the spending on the Green New Deal and the like is potentially inflationary, which puts pressure on rates, increasing the cost of capital. Many alternative energy companies are small- and mid-caps, often with significant debt and less stable cash flows, and are very vulnerable to rate rises. So, as inflationary fears re-emerged in 2021, these stocks suffered a reversal, and there’s likely more to come.

The secure provision of water is another increasingly important aspect of sustainability, one of the United Nation’s 17 sustainable development goals, and there are two funds in the table below that focus on H2O (iShares Global Water UCITS ETF USD (Dist) and Pictet-Water-P EUR).

Lastly, about half of the funds in the sector are focused on broad energy and natural resources, with oil, gas, and miners heavily represented. These saw a strong start to the year, as expectations of a rebound in the global economy accompanied by a return of inflation saw such stocks rally hard. While that trade seems to have petered out for now, the limited capacity of renewables and the world’s continuing reliance on fossil fuels—plus the need for commodities such as metals under either approach—means they are far from running out of steam.

 

 

Table 1: Top-Performing Commodities and Natural Resources Over Three Years (with a minimum five-year history)

All data as of August 31, 2021; Calculations in GBP

Source: Refinitiv Lipper

 

This article was originally published in Moneyfacts, page 18.

 

Refinitiv Lipper delivers data on more than 330,000 collective investments in 113 countries. Find out more.

The views expressed are the views of the author and not necessarily those of Refinitiv. This material is provided as market commentary and for educational purposes only and does not constitute investment research or advice. Refinitiv cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided in this publication or from any other source mentioned. Please consult with a qualified professional for financial advice.

 

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