Advisors often expect “traditional” allocations, such as large cap equities or U.S. fixed income, to provide a fair amount of exposure to commodities. For example, a small cap equity manager may have some exposure to “upstream” Exploration & Production (E&P) companies. A large cap equity manager may hold an MLP (Master Limited Partnership - often a pipeline operator) or a multinational oil and gas company like ExxonMobil. High-yield bond funds usually have small slugs in energy and materials companies too.
So is this enough exposure? What’s the rationale for having a dedicated commodities manager?
Part of the answer revolves around current market conditions. The energy and materials sectors of the S&P 500 Index are at 30-year low weightings in the index today, making it very difficult and unlikely that most managers in other asset classes are providing adequate natural resources exposure to the end client. This is precisely why a dedicated natural resources investment is important today – no other funds are offering the exposure to an out-of-favor, deep-value asset class.
Furthermore, our research suggests the best strategy is a buy-and-hold approach with natural resources as a separate allocation in a balanced portfolio. This assumes that other managers are still maintaining natural resources exposure, and that nevertheless an additional dedicated investment is prudent. This is because natural resource equity investments have been shown to have low correlations 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 a natural resources fund throughout that time would have added alpha to a portfolio given its low correlation to the broad market.
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