The case for allocating to natural resource equities is becoming more widely accepted among investors. Resource equities represent ownership interests in companies involved in the extraction, production and processing of commodities and natural resources. The diverse asset class is composed of three distinct sectors—agriculture, energy, and metals & mining—each with independent dynamics (Exhibit 1).

Natural resource assets are linked to critical (and often depleting) resources, and the industries represented in the investment universe frequently enjoy barriers to entry due to finite supply and high capital intensity. Companies’ fundamentals are generally correlated to the underlying commodities they produce, allowing resource equity investments to serve as a complement to commodities. However, they tend to perform well at different points in the economic cycle and have a lead/lag relationship with commodity futures. Further, the equity universe offers the ability to access themes that are not available via commodity futures (such as uranium, iron ore and potash).

The natural resource equity value chains

At December 31, 2024. Source: Cohen & Steers.
The information above is for illustrative purposes only. See endnotes for additional disclosures.

In the decade leading up to the Covid pandemic, there was little need for portfolio inflation sensitivity. And in today’s post-pandemic world, many investors assume inflation is once again in the rearview mirror. But since 1979 (when inflation expectation survey data became available), inflation has exceeded expectations roughly half the time—and the magnitude of the surprise has historically been high (Exhibit 2). So, while it is difficult to know where inflation will be a year from now, we believe it is prudent to have some insurance to protect against the 45% probability that inflation will surprise to the upside in any given year.

Realized inflation minus expectation

At December 31, 2024. Source: Barclays, Bloomberg, Cohen & Steers.
Past performance is no guarantee of future results. 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. Unexpected inflation calculated using the difference between the year-over-year realized inflation rate and lagged 1-year-ahead expected inflation. Expected inflation, as measured, reflects median inflation expectation from the University of Michigan’s survey of 1-year-ahead inflation expectations. Realized inflation is measured using the Consumer Price Index for All Urban Consumers (CPI-U), published by the United States Department of Labor’s Bureau of Labor Statistics.

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While resource equities are components in broad stock market indexes, compelling reasons exist for a dedicated, strategic allocation. Natural resource equities have historically offered equity-like returns and higher sensitivity to inflation than stocks and bonds, offering the potential to outperform during periods in which both stocks and bonds underperform (Exhibit 3).

Annualized real return comparison

At December 31, 2024. Source: Bloomberg, Dow Jones, FTSE, S&P, LSEG Datastream, Cohen & Steers.
Past performance is no guarantee of future results. 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. Data measured since 1973 for return and risk metrics, 1978 for inflation beta (due to data availability). 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. See endnotes for index associations, definitions and additional disclosures.

The distinct drivers of risk and return for the three natural resource sectors and fourteen subsectors—commodity supply and demand—result in low correlations with stocks and bonds, as well as with each other. An allocation can, therefore, provide valuable portfolio diversification benefits.

Adding a dedicated allocation to natural resource equities has historically improved a broad equity market portfolio (Exhibit 4). Most notably, similar to other real assets categories, returns for natural resource equities have shown attractive levels of sensitivity to inflation, particularly when inflation rises more than expected.

With payoffs that are commonly unsynchronized with the broad market, the addition of a strategic resource equities allocation can improve overall portfolio returns—without adding to volatility, and effectively maintaining a portfolio’s Sharp ratio.

In short, there is no long-run cost for adding a natural resource equities carve-out to a broad-based portfolio. And investors are rewarded with greater diversification and meaningfully positive sensitivity to inflation.

As discussed in the next section, we believe that the coming decade is likely to be substantially different than the last—and that inflation beta may be vital to maximizing portfolio returns.

Effect of adding a 20% allocation to global equities

At December 31, 2024. Source: Bloomberg, Dow Jones, FTSE, S&P, LSEG Datastream, Cohen & Steers.
Past performance is no guarantee of future results. 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 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. Data measured since 1973 for return and risk metrics, 1978 for inflation beta (due to data availability). Inflation beta is determined by calculating the multivariate regression beta of 1-year real returns to the difference between the year-over-year realized inflation rate and lagged 1-year-ahead expected inflation, including the level of the lagged expected inflation rate. Inflation is measured using the Consumer Price Index for All Urban Consumers (CPI-U), published by the U.S. Department of Labor’s Bureau of Labor Statistics. Expected inflation, as measured, reflects the median inflation expectation from the University of Michigan’s survey of 1-year-ahead inflation expectations. A real rate of return is the annual percentage return realized on an investment, which is adjusted for changes in prices due to inflation. Sharpe ratio is a measure of risk-adjusted return, calculated by subtracting the risk-free rate from a return and dividing that result by the standard deviation. The higher the Sharpe ratio, the higher the risk-adjusted return. See endnotes for index associations, definitions and additional disclosures.

The 2010s can perhaps best be characterized as an era of abundance for commodities. Excess commodity supply after the 2003–2007 China boom, low borrowing costs, and producers’ focus on market share ahead of profits, combined with technological innovation, led to excess capacity and low commodity prices through 2020 (Exhibit 5). This drove sizable underinvestment in supply.

In stark contrast, the lack of capital investment in the last decade, elevated inflation, borrowing costs post Covid-19, and several powerful demand trends will push the market into supply deficits across many major commodity groups. This, coupled with rising marginal costs of extraction, should lead to significantly better fundamentals for natural resource producers.

Rising incomes and the rapid expansion of the global middle class—set to grow by more than one billion people this decade—are driving this game-changing pivot. Higher-calorie diets and increasing per-capita consumption of energy and materials stand to fuel a 40% increase in annual spending in the decade, significantly intensifying the world’s need for natural resources. Consider energy: Low-income countries consume about six units of energy per capita. For middle-income countries, it jumps to about 30 units. And for high-income nations, it is more than 55.(1) Consumption per person increases drastically as wealth rises.

The combination of strong demand and supply constraints is already driving commodity inventories lower (below historical levels, in many cases) in what is likely the early stage of a long and powerful up-cycle for commodities and their producers.

At December 31, 2024.

(1) Source: U.S. Energy Information Administration (2023); Energy Institute – Statistical Review of World Energy (2024); Population based on various sources (2023), with major processing by OurWorldInData.org.

The call on natural resources represents significant growth potential for companies in the extractive industries (Exhibit 6). Global energy consumption will continue rising for decades, with fossil fuel demand persisting alongside significant growth in alternative energy sources. Metals demand is set to increase, driven by industrialization, urbanization, and the energy transition, with critical materials such as copper and lithium playing a vital role. Agriculture will face mounting pressure to expand food production due to rising incomes and shifting diets, with technology and biofuel demand also influencing future trends.

At December 31, 2024. Source: U.S. Energy Information Administration, The Brookings Institute, Statista, Cohen & Steers.
No representation or warranty is made concerning the accuracy of any data compiled herein, and there can be no guarantee that any forecast or opinion will be realized. Percentages may not sum due to rounding.

The strong fundamental outlook for natural resource equities comes at a time when valuations are near historical lows.

Broad equity market valuations are currently unappealing based on measures such as the Shiller cyclically adjusted price-to-earnings ratio. If history is any guide, those valuations point to sub-par returns for the broad market over the next several years. On the other hand, natural resource equities are exceptionally cheap relative to global equities (Exhibit 7). As shown on the left-hand graph below, on a price-to-cash-flow basis, resource equities were trading 2.72 standard deviations below their long-term average at the end of 2024—the third-lowest level in 40 years.

However, cheap alone is not an investment case. The scatterplot on the right goes a step further; it compares relative valuation levels of natural resource equities with their excess returns (relative to global equities) over the subsequent five years.

Historically, when relative spreads have exceeded one standard deviation, resource equities have consistently outperformed the broad global equities market over the next five years—by an average of 87%. While past performance is never an indicator of future returns, there is a strong probability that resource equities will outperform global equities, potentially by a significant margin.

Price-to-cash-flow valuation spread and 5-year cumulative excess return (Natural resource equities less global equities)

At December 31, 2024. Source: LSEG Datastream, Cohen & Steers.
Past performance is no guarantee of future performance. Valuation spread is measured by taking the relative Z-score of the price-to-cash-flow of global equities versus global natural resources. See endnotes for index associations, definitions and additional disclosures.

Many asset managers in the resource equities space are heavily concentrated in energy and mining and are significantly underweight the agriculture sector—an imbalance we feel leads to poor risk/reward positioning. An equal-weighted approach likewise fails to optimize the risk/return tradeoff.

Cohen & Steers employs a risk-efficient approach that aligns sector weights so that each contributes equally to risk. This method mitigates outsized drawdowns and creates a superior starting point for applying a bottom-up fundamental investment process. The result is a portfolio that has historically generated stronger returns with less volatility (Exhibit 8).

We use the S&P Global Natural Resources Index (which equally weights the three sectors) as a starting point, but we alter the sector weight quarterly based on prevailing volatility conditions. Currently metals & mining exhibits high volatility and consequently gets down-weighted to ~28%. The energy sector has roughly average volatility and currently merits ~35% weighting. We replace the agriculture exposure that the S&P Global Natural Resources Index uses with “agribusiness,” expanding the investment universe and providing broader access to the agriculture cycle. Agribusiness currently has meaningfully lower volatility and therefore gets up-weighted to 37%. These weightings are dynamic—so, for example, if metals & mining volatility declines, it will be up-weighted during the next rebalancing period.

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 performance. 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.
Based on rolled 3-year annualized periods since the Risk Parity Index’s July 31, 2013, inception. See endnotes for index definitions and additional disclosures.

Since its July 31, 2013, inception, the Cohen & Steers Risk Parity Global Natural Resources Index has consistently outperformed its peer benchmarks (Exhibit 9). Our quantitative asset allocation method, which dynamically adjusts sector weights based on their contributions to overall risk, tempers drawdowns and improves absolute and risk- adjusted returns. For more on our risk parity approach, see “A next- generation approach to natural resource equity investing,” available at cohenandsteers.com.

Keep in mind that while the risk parity approach aims to reduce volatility across natural resource sectors, volatility creates opportunities for active managers to capitalize on sector and subsector return dispersion, and this benefit is unavailable to index-tracking investment strategies. Active managers can also identify value at the security level through in-depth analysis of the global resource equity universe, offering another avenue for generating excess returns. Since our strategy’s inception, we have generated annual returns more than 100 basis points above the basic risk parity approach.

Key benchmark performance (July 2013 – December 2024)

At December 31, 2024. Source: Standard & Poor’s, Morningstar, Cohen & Steers.
Past performance is no guarantee of future performance. 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. Data measured from the Cohen & Steers Risk Parity Global Natural Resources Index inception. The risk parity approach 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.

Natural resource equities are an under-owned asset class that has historically offered strong returns, diversification and defense against inflation. In today’s shifting economic landscape, with the global economy transitioning into an era of scarcity, a strategic allocation to resource equities may play a vital role in optimizing portfolio outcomes.

Valuations are near historical lows, even as rising demand and supply constraints set the stage for strong growth, leaving resource equities well positioned for outperformance in the years ahead.

Cohen & Steers’ risk-efficient approach to portfolio construction, which dynamically weights resource sectors so that they contribute equally to risk, has a proven track record of enhancing the asset class’s return potential while reducing volatility. Active management provides an additional advantage—leveraging deep sector insights to capitalize on market inefficiencies and unlock greater return potential.