Bouncing back from the end of the boom

In a country where resources make up nearly three-quarters of national exports and are expected to generate some $252 billion in 2019, it is no surprise that commodities and energy funds are a popular choice, but investors need to be mindful of risks.

The mining boom is well documented for taking place between 2005-2011 but when demand weakened, prices fell sharply until bottoming out in January 2016.  Since then, however, the sector has been rebounding and has now risen 121 per cent since its lowest point.

Over the past year, the ASX 200 Resources index has risen 11.8 per cent over the past 12 months which compares favourably with returns of 7.5 per cent over one year by the S&P ASX 200.  

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The government has also released a National Resources Statement, its first long-term plan for the resources sector in 20 years and an indicator of the demand expected for resources going forward. 

In the statement, the Australian Government said: “Significant opportunities exist for new and expansion projects across most mineral and energy commodities as growing demand begins to fully absorb the supply overhangs of the last decade.

“Global demand for resources is projected to grow at a steady rate over coming decades, driven by growing populations and economic development in emerging economies.”

Fund performance

According to FE Analytics, there are 19 funds in the ACS Commodity and Energy sector, 10 of which are exchange traded funds (ETFs), across a variety of sectors such as agriculture, mining, gold and resources.

Jun Bei Liu, portfolio manager at Tribeca Investment Partners, said an active manager was the best way for investors to access the sector.

“If you don’t have the expertise, active managers are good at what they do and look globally so they are an easier way to play resources than buying the physical commodity.”

This was echoed by David Bassanese, chief economist at BetaShares: “Resources are more volatile than other sectors, there is a level of complexity required when investing in them so if you don’t have that knowledge then consider a diversified resources fund.”

The best-performing funds over the year to 27 May were both Australian resources ETFs, from VanEck and BetaShares, both returning 11 per cent. At the other end of the spectrum was an active fund run by Terra Capital, Terra Capital Natural Resources, which invests in micro-cap natural resources companies and lost 27 per cent over the same period. 

Terra Capital, in particular, is a good example of the vagaries of investing in resources as its fall in 2018 proceeded an extremely strong run in 2017 when it returned more than 74 per cent. In a note to clients, the firm blamed lagged performance of small and mid-cap energy names for the downturn this year.

Resources funds can be more volatile than other sectors however, as they are more sensitive to economic and regulatory developments. There are also question marks over what can be included in a ‘resources’ fund, leaving investors potentially invested in dubious companies if they don’t do their homework.

Bassanese said: “Iron ore and oil have been performing strongly but agriculture has been weak due to poor growth conditions. They are a diverse group so you have to know what you are doing.”

“Resources are absolutely more risky than other sectors,” said Liu. “They give good rewards if you buy at the right time of the cycle but supply will always come on so you have to be mindful of that risk.”

Looking at the outlook for the sector, the push for electric cars is already fuelling demand for materials such as cobalt and lithium. However, Bassanese cautioned investors from getting caught up in market hype.

“Fossil fuels are popular but in the long term newer areas such as lithium and renewable energy may do relatively well. But I would caution investors to be wary of buying into a strongly-rising market and not to get caught up in speculative bubbles.”

Five-year performance of the S&P ASX 200 v the Commodity and Energy sector to 20 May, 2019

Source: FE Analytics

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