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    Revisiting the Rationale for Natural Resources and Commodities

    blog-natural-resources-author-details(Andrew Musgraves),
    November 01, 2017
     

    While markets continue to overreact to just about every news headline related to natural resources, creating a heightened level of short-term uncertainty, the long-term rationale for investing in natural resource equities and commodities remains as solid as ever. Notably, an allocation to natural resources and commodities can provide unique benefits to investors not only as a tool to enhance portfolio diversification, but also as a means to gain direct access to global growth and as a hedge to offset the impact of inflation.

    Leverage to Global Growth

    The link between global growth and natural resources and commodities is quite logical: economic expansion increases the demand and need for raw materials. Steady, consistent global growth tends to be reflected in increased asset prices across all major asset classes. The impact that even slightly positive changes in global growth can have on natural resource equity and commodity returns is significant. In years when global growth has risen from the previous year, or experienced a "positive inflection", natural resource equities and commodities have dramatically outperformed both U.S. equities and bonds.

    Average Annual Return in Years With Positive GDP Inflection
    (1970 - 2016)

    Average Annual Return in Years With Positive GDP Inflection Chart

    Source: Bloomberg; FactSet; CRSP; FRED; VanEck. Data as of December 31, 2016. Past performance is not indicative of future results. Years of positive GDP inflection determined by calendar year periods when GDP growth increased from the previous year. The performance of certain return streams is hypothetical with the benefit of hindsight and knowledge of factors that may have positively affected its performance, and cannot account for all financial risk that may affect the actual performance of any VanEck product. The returns of actual accounts investing in natural resource equities, commodities, energy equities, diversified mining equities, gold equities, U.S. equities and U.S. bonds strategies are likely to differ from the performance of each corresponding index or return stream. In addition, the returns of accounts will vary from the performance of the indices for a variety of reasons, including timing and individual account objectives and restrictions. Accordingly, there can be no assurance that the benefits and risk/return profile of the indices shown would be similar to those of actual accounts managed.

    Inflation Hedging

    Natural resource equities and commodities have historically exhibited a strong link to inflation: they perform well in both rising interest rate environments and during periods of higher-than-average growth in general consumer price levels. As seen in the chart below, in moderate inflationary regimes – with 2%-6% year-over-year inflation – the performance of natural resource equities and commodities has been slightly higher than, or in-line with, U.S. equities. In periods of higher inflation (greater than 6% year-over-year) they have significantly outperformed both domestic U.S. equities and bonds.

    Average 12-Month Return Under Varying Inflation Rates
    (1970 - 2016)

    Average 12-Month Return Under Varying Inflation Rates Chart

    Source: Bloomberg; FactSet; CRSP; FRED; VanEck. Data as of December 31, 2016. Past performance is not indicative of future results. The performance of certain return streams is hypothetical with the benefit of hindsight and knowledge of factors that may have positively affected its performance, and cannot account for all financial risk that may affect the actual performance of any VanEck product. The returns of actual accounts investing in natural resource equities, commodities, energy equities, diversified mining equities, gold equities, U.S. equities and U.S. bonds strategies are likely to differ from the performance of each corresponding index or return stream. In addition, the returns of accounts will vary from the performance of the indices for a variety of reasons, including timing and individual account objectives and restrictions. Accordingly, there can be no assurance that the benefits and risk/return profile of the indices shown would be similar to those of actual accounts managed.

    When inflation has outpaced expectations or "surprised" to the upside (see chart below), natural resource equities and commodities have outperformed other inflation-hedging asset classes including infrastructure, Real Estate Investment Trusts (REITs), and U.S. Treasury Inflation Protected Securities (TIPS).

    Average 12-Month Return in Periods of Positive Inflation Surprise
    (2003 - 2016)

    Average 12-Month Return in Periods of Positive Inflation Surprise Chart

    Source: Bloomberg; FactSet; CRSP; FRED; VanEck. Data as of December 31, 2016. Past performance is not indicative of future results. Analysis conducted for time periods between December 2002 to December 2016 based upon availability of data. “Positive Inflation Surprise” determined by months where a year-over-year percent change in inflation (as measured by CPI-U) was higher than 1-year-ahead forecasts from University of Michigan’s inflation survey. The performance of certain return streams is hypothetical with the benefit of hindsight and knowledge of factors that may have positively affected its performance, and cannot account for all financial risk that may affect the actual performance of any VanEck product. The returns of actual accounts investing in natural resource equities, commodities, infrastructure, REITs, international equities, TIPS, U.S. equities and U.S. bonds strategies are likely to differ from the performance of each corresponding index or return stream. In addition, the returns of accounts will vary from the performance of the indices for a variety of reasons, including timing and individual account objectives and restrictions. Accordingly, there can be no assurance that the benefits and risk/return profile of the indices shown would be similar to those of actual accounts managed.

    Accessing Natural Resources and Commodities

    While broad exposure to natural resource equities and commodities – for example, via passively managed indexed products – offers specific benefits as discussed previously, we believe investors should consider the additional role that an active approach can play. The price movement of individual natural resource equities and commodities can differ dramatically under varying global growth and inflation regimes. Needless to say, this disparity can, at times, also be magnified by the impact that solid company fundamentals (such as superior management, capital allocation, and cost restraint) can have on company returns, independent of commodity price movement.

    Active vs. Passive Natural Resource Equity Fund Returns
    (1999 - 2016)

    Active vs. Passive Natural Resource Equity Fund Returns Chart

    Source: Morningstar; FRED; VanEck. Data as of December 31, 2016. Past performance is not indicative of future results. Analysis conducted for time periods between January 1999 to December 2016 based upon availability of data. Years of positive GDP inflection determined by calendar year periods when GDP growth increased from the previous year. "Positive Inflation Surprise" determined by months where a year-over-year percent change in inflation (as measured by CPI-U) was higher than 1-year-ahead forecasts from University of Michigan's inflation survey.

    As indications of synchronized global growth became more evident in the third quarter of 2017, the investment rationale for natural resources and commodities has become increasingly relevant. VanEck's natural resources investment strategies span the breadth of commodities sectors, across mutual funds and ETFs, including the Global Hard Assets Fund, International Investors Gold Fund, CM Commodity Index Fund as well as a full suite of passively managed hard assets and commodities VanEck Vectors ETFs.