To say the past several years have not been kind to natural resource funds would be a bit of an understatement – the five-year average annual compound return from the category was a less-than-impressive -6.8% through April 2015, and the one-year return through April was a dismal -18.9%. Nevertheless, Chris Beer, manager of the category-beating RBC Global Resources Fund, sees room for optimism.
Much of the past year’s underperformance stemmed from the collapse of crude oil prices (from US$115 per barrel in June 2014 down to U$S46 a barrel in January 2015). Prices have since recovered a bit of ground, though, and had reached US$63 a barrel by the end of April.
The net result has been a recent rebound in resource fund performance. Despite that dismal one-year return, natural resource funds generated an average 5.1% during the three months ended April 30, 2015, and 3.2% during the month of April alone.
Of course, some individual funds have fared much better since the recession in 2009. The RBC Global Resources Fund, for example, has returned a respectable 8.9% year to date to April 30. It managed a five-year average annual compound return of 1.3% through April, and a loss of “only” -8.9% in the past 12 months, resulting in a still respectable 10-year return averaging 9.1% annually.
Part of the reason for its stronger showing, according to Chris Beer, vice-president and senior portfolio manager of global equities at RBC Global Asset Management Inc. in Toronto, and co-manager (along with Brahm Spilfogel) of the resource fund, was an underweighted position in energy.
“The benchmark for natural resource funds is 59% energy and 41% materials, and we’re now at 54% energy,” says Beer, but adds that the recent downturn in energy fortunes has presented some buying opportunities. “We’ve been increasing our energy holdings of late,” he says. “We think the real normalized price of oil should be in the US$70 to US$75 a barrel range.”
In building its position, however, the fund’s bottom-up focus is on “E&P” (exploration and production) companies rather than the big integrated players. “E&Ps like Encana tend to outperform the integrateds, which are more defensive. [The latter] have better dividend yields, but they also tend to have the most trouble growing. If you look through the list of integrated companies, the only ones with four-to-five percent growth and a four-to-five percent yield, with a strong management team, are Total and Suncor (Courbevoie, France-based Total SA, and Calgary, Alberta-based Suncor Energy Inc.).”
Beer also says that while natural gas production is strong, the sector has been hurt by a lack of distribution capacity. “There’s lots of gas but not enough pipelines,” he notes. “In this scenario, the low-cost producers will displace the high-cost producers; the low-cost ones are usually the last guys standing.”
For the rest, Beer believes some companies in the materials sector are currently somewhat better positioned than energy stocks, hence the fund’s continued overweighting versus energy, despite recent energy stock purchases. “During the last little while, we’ve been in a U.S. dollar bull market, and we think that still has two to three years to play out,” he says.
“North American chemical, forest products, and pipelines companies will tend to do better than mines, which are more globally oriented,” Beer adds. “We’re positive on oil prices, but right now natural gas is in oversupply, and we think that will benefit North American chemical producers.”
And overall, despite the difficulties of the past few years, Beer remains positive. “Natural resources have underperformed since 2007, and the sector has certainly seen some bad times,” he says. “But if global growth recouples, we think the sector will see stronger growth again.”
Olev Edur is an experienced financial and business journalist and a frequent contributor to the Fund Library.
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