Natural resource equities offer investors unique investment opportunities. And we believe their attractive valuations, along with secular megatrends, set the stage for potentially strong total returns in the coming years. However, many existing resource equity strategies have historically failed to deliver acceptable risk-adjusted returns, and have exhibited high levels of volatility.

Our analysis and past performance indicates that certain quantitative allocation techniques can be used to mitigate some of the factors contributing to this volatility in natural resource equity allocations. By focusing on risk management and strategy-level volatility, as well as fundamentally driven active management, Cohen & Steers believes that superior risk-adjusted returns may be attainable compared to the more traditional approaches.

Total return vs. volatility ( July 31, 2013 inception to December 31, 2024)

At December 31, 2024. Source: Standard & Poor’s, Cohen & Steers.
Past performance is no guarantee of future results. Cohen & Steers Risk Parity Global Natural Resources Index is a combination of the constituents of the S&P Global Natural Resources Energy Subindex, S&P Global Natural Resources Metals & Mining Subindex and S&P Global Agribusiness Index, weighted according to a proprietary methodology developed by Cohen & Steers and implemented by S&P. See endnotes for index definitions and additional disclosures.

There are three primary themes for allocating to natural resources: a means of capitalizing on favorable long-term secular supply and demand trends, a tool for enhancing portfolio diversification and a potential hedge against inflation. Traditionally, this asset class has focused on three main categories: energy, metals & mining and agriculture. The fundamentals of these equities are typically linked to the underlying commodities they produce. However, in some cases, futures markets do not have securities for all types of commodities. Examples such as uranium, potash and poultry have no representation in the futures markets but are investable through the equities that produce these commodities.

Many asset managers tend to be heavily concentrated in the energy and mining sectors, consistent with those sectors’ relatively high market capitalization. Consequently, they tend to derive more risk contribution from these sectors as well. Single-sector approaches, meanwhile, may be challenging for investors to position in size and maintain desired exposure.

More than a decade ago, Cohen & Steers took a different approach, employing an equally weighted, risk-parity framework to the three core resource equity components. Risk parity is a quantitative asset allocation method that assigns asset weights based on their contributions to overall risk, unlike many strategies that follow market-capitalization-based or equal- weighted index methodologies. The goal of our risk-parity approach within natural resources is to improve diversification by aligning the weights of the sectors—energy, metals & mining and agribusiness—so that they each contribute equally to overall risk. Since volatility and correlations are not static, our risk-parity approach is dynamic in that sector weights are adjusted periodically as sector volatility changes.

Performance since C&S Risk Parity Index July 31, 2013 inception

At December 31, 2024. Source: Bloomberg, Cohen & Steers.
Past performance is no guarantee of future results. An investor cannot invest directly in an index and index performance does not reflect the deduction of any fees, expenses or taxes. The information presented above does not reflect the performance of any fund or other account managed or serviced by Cohen & Steers, and there is no guarantee that investors will experience the type of performance reflected above. There is no guarantee that any historical trend illustrated above will be repeated in the future, and there is no way to predict precisely when such a trend will begin. The risk-parity approach to the S&P Global Natural Resources Index weights the S&P GICS industries of the Global Agribusiness Index, Global Energy Index and Metals & Mining Index according to projected volatility and correlations. See endnotes for index definitions and additional disclosures.

A focus on risk parity differentiates Cohen & Steers’ strategy in a number of ways:

• We broaden the opportunity set for agriculture by including a more inclusive group—agribusiness.
• Historically, we maintain lower exposure to energy and mining and have a greater allocation to ag than a more conventional market-capitalization weighting scheme due to underlying sector volatility.
• Portfolio construction based on fundamental security analysis enables further diversification and significant alpha opportunities across an even broader range of equities.

Exhibit 2 uses the 10-year annualized performance of commonly used indexes to illustrate the potential utility of a risk-parity approach to investing globally in a diversified portfolio of natural resource equities. As the exhibit illustrates, allocating based on the Cohen & Steers Risk Parity Global Natural Resources Index (roughly 30% metals & mining, 35% energy and 35% agribusiness) historically increases annual returns and reduces volatility. In addition, the Sharpe ratio shows the superior risk-adjusted return when using this example allocation—and this is before the potential benefits of active management.

This more “risk efficient” approach can help protect capital over the long term and potentially mitigate outsized drawdowns. Based on rolled three-year annualized returns from its July 31, 2013 inception through September 30, 2024, returns for the Cohen & Steers risk parity approach have outperformed the S&P Natural Resources Index over 58% of periods and produced lower volatility in 83% of periods.

The expanded agribusiness universe increases both the market capitalization and the number of equities available for investment.

As mentioned above, a key distinction in Cohen & Steers’ approach is our allocation to agribusiness. Agribusiness includes industries such as farm machinery, food processors and packaged food companies. Notably, these industries are components of the S&P Global Agribusiness Index, but are either minimized or excluded from the S&P Global Agriculture Index.

In many cases, agricultural commodities play a significant role in determining the fundamental outlook for these businesses. In addition, agribusiness has also shown a correlation with farmland, a recognized tangible real asset.

Further, we exclude the paper packaging, paper products, and timber REIT sectors that are included in the S&P Global Agriculture Index. Historically, these sectors have been less sensitive to the macroeconomic factors that drive most natural resource companies.

In our view, investing in agribusiness represents the next-generation approach to allocating to agriculture. Using the expanded agribusiness universe increases both the market capitalization and the number of equities available for investment. As the table below demonstrates, this sector is notably underrepresented in most natural resource equity indexes.

Cohen & Steers approach vs. the common benchmarks

At December 31, 2024. Source: Standard & Poor’s, Cohen & Steers.
Other includes paper products, paper packaging and timber. Cohen & Steers Risk Parity Global Natural Resources Index is a combination of the constituents of the S&P Global Natural Resources Energy Subindex, S&P Global Natural Resources Metals & Mining Subindex and S&P Global Agribusiness Index, weighted according to a proprietary methodology developed by Cohen & Steers and implemented by Standard & Poor’s. See endnotes for index definitions and additional disclosures.

Overall diversification can also be enhanced by adopting a global approach to portfolio construction. A key reason that the S&P North American Natural Resources Index is so heavily weighted in energy is due to the lack of listed mining and agribusiness companies in North America. Mining companies comprise only 18% of this index, and agribusiness companies have no allocation at all. A strategy modeled upon the sector allocations of this index results in excess exposure to energy companies domiciled only in the United States and Canada.

In addition to aiding diversification, a global approach also allows us to more effectively implement risk parity due to a significantly higher number of available equities with varied degrees of volatility. Exhibit 4 highlights the industries we invest in globally, several of which are absent from most natural resources indexes, such as construction & farm machinery, packaged foods & meats and agricultural products.

Select natural resource equity sectors

At December 31, 2024. Source: Standard & Poor’s, Cohen & Steers.

While ongoing risk management is an essential component of the asset management process, delivering alpha is also highly dependent on bottom- up security selection. Not only are the drivers of risk and return diverse within energy, metals & mining and agribusiness, but the opportunities are also global, which requires a macro perspective and knowledge of economic, political and regulatory issues. Moreover, the supply and demand economics of the underlying natural resources can play a significant role in determining the expected performance of the equities. Exhibit 5 displays the performance dispersion across the global natural resource universe, highlighting the potential benefit from active management.

We believe that an active manager can pursue alpha more effectively through expanded opportunities for excess return potential without altering the strategy’s risk profile. The outcome of our work is a globally positioned risk- parity approach that (i) assesses the evolving volatility and correlations of the various sector components, (ii) uses bottom-up security selection across a unique sector allocation framework, and (iii) has the potential to provide an effective long-term framework for allocating to additional, relevant investments outside of the typical index or portfolio.

In conclusion, we believe investing in natural resource equities using a risk- parity approach coupled with bottom-up stock selection can more effectively diversify the drivers of a portfolio’s risk and return than a construction methodology based on the underlying sector weightings of a natural resource equity index. Our approach is less energy-centric and more globally positioned to capture emerging opportunities. In our view, this approach has the potential to deliver attractive total returns with less volatility observed in traditional natural resource equity benchmarks and portfolios.

Security level performance within the Global Natural Resources Index (%)

At December 31, 2024. Source: Morningstar, Cohen & Steers.
Past performance is no guarantee of future results. The information above does not reflect information about any fund or account managed or serviced by Cohen & Steers, and there is no guarantee that investors will experience the type of performance reflected above. There is no guarantee that any historical trend illustrated above will be repeated in the future, and there is no way to predict precisely when such a trend will begin. See endnotes for index definitions and additional disclosures.