During the quarter, VanEck's hard assets strategy returned 8.71% (measured by VanEck Global Hard Assets Fund, Class A (GHAAX), excluding sales charge). On a relative basis, the Fund outperformed its commodity equities-based benchmark index, the Standard & Poor's® (S&P) North American Natural Resources Sector Index (SPGINRTR), which returned 5.94% over the same period.
Underpinning nearly all positive commodity price performance during the quarter were improved demand fundamentals fueled by synchronized global growth among developed and emerging markets.
Crude oil prices continued to firm through the quarter, driven mainly by persistent demand, declining global inventories, compliance from OPEC and Russia on self-imposed oil production quotas, and extended commitments to those quotas into 2018. While returns in the energy equity sector were, on average, positive during the quarter, the unprecedented decoupling of performance of higher-beta energy stocks – in particular, of unconventional oil and gas exploration and production (E&P) companies – from crude oil prices persisted through the end of the year. Weaker relative performance combined with, by and large, a growing unrest among the investment community with E&P companies' limited shareholder returns, perpetuated outflows.
Within diversified metals and mining, the combination of global demand support, Chinese capacity rationalization, and company financial discipline led to more balanced markets, better commodity prices, and stronger equity performance. After pulling back briefly in November, diversified metals and mining stocks rallied by quarter end on the back of stronger copper and zinc prices, which climbed to four-year highs.
Within the agriculture sector, fertilizer demand was satisfactory with both potash and urea markets coming slowly back into balance. Following what appears to have been a bottom in the third quarter, fertilizer stocks started to reverse trend and eventually outperformed the underlying price of fertilizers. Protein markets also continued to fare well with better beef and chicken prices.
Top Quarterly Contributors/Detractors
Source: FactSet; VanEck. Data as of December 31, 2017.
Contribution figures are gross of fees, non-transaction based and therefore estimates only. Figures may not correspond with published performance information based on net asset value (NAV) per share. Past performance is not indicative of future results. Portfolio holdings may changes over time. These are not recommendations to buy or sell any security.
We exit 2017 with the strongest global economic growth forecasts since the financial crisis. With an outlook for further synchronized growth in 2018, we see tighter supply and demand balances for a vast majority of the commodities that we follow closely.
Within energy, we continue to monitor how the investment merits of the sector are being considered by investors. Energy companies, especially those in unconventional oil and gas exploration and production, are increasingly under the microscopes of investors after years of heavy investment in acreage acquisitions and infrastructure build out.
While we view much of this investment over the last decade as "sunk" capital necessary for future growth and profitable production extending into at least the early 2020s, we also believe that the focus of E&P companies should now be on moderate growth, cash flow generation, spending within cash flow, and delivering returns. E&P companies have listened and we have already started to see dividends and share repurchase programs from some.
It is important to remember that, on a technical basis, commodities and natural resource equities also exist in a quantitative/factor driven market, with momentum playing a significant role. The energy sector of today may well be compared to the metals and mining sector of three years ago when many of the major companies were considered all but bankrupt. Now these mining companies have significantly less debt, are throwing off cash, and delivering solid returns – aided by a rationalization process which eventually drove increased allocations to the metals and mining sector in 2016 and 2017. A market in which momentum factors drive fund flows is self-reinforcing and we would not be surprised if the metals and mining sector performs well once again in 2018 as a result.
One of the main pillars of our investment philosophy continues to be to look for long-term growth. Positioning our portfolio for the future and not just reacting to current circumstances is of paramount importance and our focus remains on companies that can navigate commodity price volatility and help grow sustainable net asset value.
1 The S&P North American Natural Resources Sector (SPGINRTR) Index (the "Index") provides investors with a benchmark that represents U.S. traded securities that are classified under the GICS energy and materials sector excluding the chemicals industry; and steel sub-industry.
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