Fund manager Q&A: Betting on demand for natural resources
Solid economic growth in the U.S. and abroad has helped push up prices for oil, lumber, cotton and many other commodities this year.
The trend is one reason why the price of U.S. crude oil has been moving higher since last summer, recently crossing the $70 a barrel threshold for the first time in more than three years, and why energy sector stocks are up 5.5 percent this year.
The United Nations recently issued a forecast calling for the global economy to expand by more than 3 percent this year and next year. Last month, the International Monetary Fund projected worldwide economic growth of 3.9 percent this year, which would be the fastest pace since 2011.
Both forecasts were tempered with warnings about rising trade tensions and the potential for tariffs or other restrictive measures to dim global growth.
Even so, companies in the business of meeting the demand for natural resources, especially in emerging markets, should remain good long-term bets for investors, says Rob Young, portfolio manager of Icon Advisers’ Natural Resources Fund (ICBMX).
“Commodities have been doing well since early 2016, so I do think that we are in an environment when those commodity oriented names are assuming that leadership position, and that’s what I think will ultimately be a nice tail wind to those natural resources-oriented sectors,” he said.
Young recently talked about what goes into selecting companies for his fund and how investors should think about natural resources stocks. Answers have been edited for clarity and length.
Q: How do you select the companies in the fund?
A: It’s a global fund, so based on our valuation methodology what we do is we compile all the names within the natural resources sector, which is clearly the materials and energy sectors. We can layer in some industrials as well.
We’re certainly long-term investors. We are trying to pick names that are going to have leadership within the next one to two years.
Q: Why does the fund mostly invest in companies outside the U.S?
A: We see a lot of value in emerging market energy names. We’re also seeing improving earnings outlooks.
One of our favorite themes happens to be Indonesian coal. The Indonesian coal market has some tail winds associated with it because there are about 40 million people in the country that don’t have electricity. The government has proposed a plan to shrink that gap over the next several years. They’re doing so by building power plants, and they’ve really emphasized coal-powered plants as part of that initiative.
We think that China-gas theme is something that’s going to have a very long tail. China is highly dependent on the coal market and they tend to utilize very little natural gas. Russia has the largest natural gas producer in the world and is building a pipeline down to China that’s about 85 percent complete.
Q: Materials stocks are negative for the year. How has that affected the fund?
A: The materials sector is actually positively contributing to us. A lot of that is because of the gains we’re seeing in paper and packaging names. The theme behind this is really the proliferation of e-commerce really taking hold. And one of the common elements of any type of e-commerce-oriented transaction is the packaging that’s associated with that. We’re seeing value in the names that manufacture those cardboard boxes.
Q: Is this a good time to invest in natural resources companies?
A: We do think it is a good time. There are several positive tail winds that are associated with that group of companies. They really have not participated in the market rally that we’ve seen over the last nine years, and we’re starting to see a participation of those underlying names really start to assume that leadership position.
Q: How much do global trade tensions concern you, given the fund’s exposure to emerging markets and commodities?
A: There’s no question over the last couple of months the trade rhetoric, protectionist environment has really captured a lot of headlines. But what we’re trying to focus in on in is what is actually happening in the credit markets. We have the underlying belief that those credit markets are going to be the signaling event for when equities are going to start to fall, six, nine, 12 months in the future.