Albert Chu, Portfolio Manager at Man Group, joined Keith Black, Managing Director of RIA Channel, to discuss his role as a portfolio manager of a natural resources ETF.
Natural resources include allocations to the energy, metals and mining, agriculture, and food sectors. When held as equities, these investments earn a positive dividend yield while offering liquidity and low long-term correlations to other investments. Natural resources stocks aren’t just a beta play to underlying commodity markets but experience return dispersion relative to the sector. There is diversification within the commodity sector, as gold rallied over 25% in 2024 while energy was weak. These stocks can also be effective hedges against inflation and geopolitical turmoil
Natural resource equities and commodity futures are both highly liquid and correlated to the underlying commodity market. Investing in equities allows for more targeted investments. For example, stocks are available in pipelines, oil field services, refiners, and renewable energy, while futures focus on oil, unleaded gas, heating oil, and natural gas.
When futures markets are in contango, long-dated futures contracts will trade at a higher price than spot markets. Long-term holders of futures markets in contango will underperform spot prices. Cash flows to natural resource equities are typically earned by selling commodities at the spot price rather than in the futures market, potentially capturing a greater portion of the price move in the underlying commodity.
For now, the energy mix requires both fossil fuels and renewable energy resources. Renewable energy can grow as a source of electricity generation once cost-effective technologies are available to store the generated power. Investors in renewable energy also need to understand the regulatory environment and subsidies available in this sector.
Natural resources offered strong returns during the post-COVID time of rising inflation and serve as one of the few asset classes that can benefit during inflationary scenarios. Trump’s administration is targeting pro-growth policies, including reshoring and growing manufacturing. With both China and the US simultaneously pursuing stimulative policies, allocations to natural resources may benefit from the macro environment.
Risk management for natural resources equities requires understanding market cycles, proper diversification across stocks and sectors, maximum position sizes, and changing allocations when the macroeconomic thesis changes.
Albert Chu will be discussing the evolution and state of global natural resources on the WEBCAST – Advisor Playbook
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