While many investors we speak with have dedicated allocations to natural resources, others believe the cyclicality of the asset class warrants a market timing approach. One opinion we’ve heard from investors is: “natural resources seem like a good investment in 2-3 years if the super cycle continues.” But if that thesis plays out, when would be the right time to establish exposure to the asset class in order to catch the upside?

WTI Oil Prices, Trailing-Ten Years

As of 4/12/2019

Source: www.nasdaq.com

While it is difficult to call the exact bottom of a large, drawn-out bear-market, we can use history as a broad guide to show where we are in the cycle. Measuring natural resource prices vs. S&P 500 shows that we are approaching a 100-year low valuation (read our previous blog: Commodities Are Rocking). In the only other periods that have approached today’s level of natural resource “cheapness,” (1929 and 1969), in both cases it was an excellent time to be a Natural Resources investor.

The problem with trying to call the exact bottom is that moves off the bottom can be violent and unpredictable. A lot of performance is held in those abrupt changes, and so while it can be frustrating to be early to an underperforming asset class, as value investors we would rather do that than risk potentially missing the start of the rally. Furthermore, our track record suggests the best strategy is a buy-and-hold approach. This is because natural resource equity investments have been shown to have low correlation to the broad market. This makes them an ideal diversifying investment that should be owned throughout the cycle, and not just in an opportunistic manner. If you look since 1991, the natural resources market has been in a bear-market the majority of the time (1991-1998 and 2011-2018). Despite this, owning our strategy throughout that time would have added significant alpha owing to its low correlation to the broad market.

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