During the quarter, VanEck's hard assets strategy returned -5.51% (measured by VanEck Global Hard Assets Fund, Class A (GHAAX), excluding sales charge). On a relative basis, the Fund outperformed its natural resource equities-based benchmark, the Standard & Poor’s® (S&P) North American Natural Resources Sector Index (SPGINRTR), which returned -6.04% over the same period.
The broad trends that impacted global capital markets in the first quarter of 2018, primarily higher volatility fueled by uncertainty around the direction of U.S. economic policy, had a direct effect on the commodities and natural resources markets.
While most commodity prices were up on the quarter, equity market volatility caused many natural resource equities to underperform their respective commodity counterparts. For example, WTI crude oil, gold, and agriculture commodities were up approximately 7.5%, 1.7%, and 3.2%, respectively, during the quarter while energy, gold mining, and agriculture stocks were down approximately 5.9%, 5.5%, and 0.6%, respectively. The exception during the quarter was diversified metals and mining where, though collectively down around 4%, stocks outperformed absent support from underlying base and industrial metals prices, which were down approximately 6.2% on concerns over a global trade war.1
What may be lost or misunderstood for many investors during the current environment is the fact that commodity fundamentals and supportive trends remained intact during the quarter:
Despite expanding U.S. onshore supply, global oil markets were stable with inventories continuing to fall and demand remaining firm.
Fed rate hiking risks, and the potential for further weakening in the U.S. dollar, helped establish a positive trend in gold prices.
For the calendar year of 2017, total earnings by diversified metals and mining companies nearly tripled that of 2016, highlighting the commitment to the return of capital to shareholders.
Water shortages in Argentina and drought in Kansas pushed up soymeal and wheat prices and, late in the quarter, the U.S. Department of Agriculture acreage report indicated significantly lower corn and soy planting than expected.
Top Quarterly Contributors/Detractors As of March 31, 2018
Source: FactSet; VanEck. Data as of March 31, 2018. Contribution figures are gross of fees, non-transaction based and therefore estimates only. Figures may not correspond with published performance information based on NAV per share. Past performance is not indicative of future results. Portfolio holdings may change over time. These are not recommendations to buy or sell any security.
At the peak of capital expenditure reduction efforts in the metals and mining industry, companies and investors became highly critical of how production and operational capital—or “growth capital”— was being employed. Shareholders demanded that excess cash be returned via dividends and/or used to reduce debt so that companies could operate more efficiently, rather than be spent on further expansionary efforts. Simultaneously, as economies began conceptualizing future demand growth, and given the advent of clean energy technologies such as electric vehicles, the need for more metals such as copper, nickel, graphite, and cobalt became abundantly clear. Eventually this created, what we believe to be, an ideal environment for these companies: relatively balanced supply/demand fundamentals, sustainable commodity prices, low cost structures, high cash flow, and the desire of most companies to return capital to shareholders.
For the last year, we have been examining how such a reform process, when applied to the U.S. energy market, has the potential to transform that industry, too. We noted last quarter how 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 and infrastructure build out. Exploration and production (E&P) companies are now transitioning from “investment” to “harvest” mode, with mature, cash-flow heavy business enabling dividends and share repurchases, and participating only in rational, accretive acquisitions. At the end of the quarter, two of our U.S. unconventional energy holdings with operations focused in the Permian Basin announced an $8 billion M&A deal, the largest in the “patch” since 2012. The transaction should result not only in some very important economies of scale and efficiencies for both the parties involved, but also improve crude fundamentals as fewer players should lead to better discipline.
All this being said, and while we believe the industries we follow are in the best fundamental shape that they have seen in years, fundamentals can be, and often are, overlooked in declining equity markets. The divergence in performance between commodities and natural resource equities seen in the last quarter—and, to some extent, most of the last four quarters—highlights the impact that broad equity market risk can have on the space. That is why our investment philosophy has been, and 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 both commodity and equity price volatility and help grow sustainable net asset value.
1 Agriculture and base and industrial metals prices represented by the Bloomberg Agriculture and Bloomberg Industrial Metals Total Return subindices, respectively. Energy, gold mining, agriculture, and diversified metals and mining stocks represented by the Energy Select Sector Index, NYSE Arca Gold Miners Index, MVIS Global Agribusiness Index, and MSCI ACWI Select Metals & Mining Producers ex. Gold & Silver Index, respectively.
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Please note that Van Eck Securities Corporation offers investment portfolios that invest in the asset class(es) mentioned in this post. Commodities are assets that have tangible properties, such as oil, metals, and agriculture. Commodities and commodity-linked derivatives may be affected by overall market movements and other factors that affect the value of a particular industry or commodity such as weather, disease, embargoes or political or regulatory developments. Risks may also include investing in wholly owned subsidiary, risk of tracking error, risks of aggressive investment techniques, leverage risk, counterparty risks, non-diversification risk, credit risk, concentration risk, and market risk. Diversification does not assure a profit nor protect against loss.
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