Adding natural resource equities to an investor’s asset allocation can help improve portfolio outcomes while providing greater diversification and sensitivity to inflation. However, we believe the complexities of resource equities make an active management approach the superior choice (over passive strategies) when allocating to the asset class.

In certain asset classes, passive strategies can be a cost-effective and simple- to-implement investment approach. But natural resource markets tend to be quite volatile due to factors such as fluctuating commodity prices, geopolitical events and supply/demand imbalances. The result is that passive strategies have historically displayed a wider range of outcomes (Exhibit 1).

In contrast, active managers have demonstrated a tighter risk/reward cluster, on balance producing greater returns with less volatility. We believe this is due to active managers’ ability to pivot quickly in response to changing conditions to capitalize on short-term opportunities and mitigate risks.

Morningstar Natural Resources category peers, 3-year risk vs. return

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. Morningstar peers reflects oldest share class—Mutual Funds and ETFs. Volatility (standard deviation), measures the dispersion of a set of data from its mean. See endnotes for additional disclosures.

Resource equities are a broad and diverse asset class composed of three distinct sectors, each with independent dynamics and cycles. The diversity of the companies across the asset class can result in significant return differences between sectors and subsectors in any given period. As a result, active managers can benefit from both short-term opportunities and secular trends to degrees that passive strategies, limited by strict benchmark weightings, cannot.

The disparate drivers of performance of the three natural resource equity sectors are also reflected in their low correlations to each other and the broad market (Exhibit 2). The historical average cross-correlation between natural resource equity sectors is just 0.63.

Specialist managers with the experience and resources to understand the market and position portfolios appropriately, adroitly adjusting their sector and subsector exposure, may enhance potential risk-adjusted returns. Dynamic allocations may take advantage of changing conditions, allowing active managers to strategically overweight high-growth areas or underweight declining industries, based on expected market trends and policy shifts.

Global natural resource equity sector 10-year correlations

At December 31, 2024. Source: Cohen & Steers.
Past performance is no guarantee of future results. 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 represents the stocks held within the S&P Global Natural Resources Index. Metals & mining represented by the S&P Global Metals & Mining Index. Energy represented by the S&P Global Energy Index. Agriculture represented by the S&P Global Agriculture Index. Correlations vary from –1.0 (perfect inverse relationship) to 1.0 (perfect synchronization). The mention of specific sectors is not a recommendation or solicitation for any person to buy, sell or hold any particular security in a sector and should not be relied upon as investment advice. See endnotes for index definitions and additional disclosures.

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Throughout the commodity cycle, different parts of the supply chain accrue value at various times. As we have shown, active managers can look deeper into the supply chain (at times, prioritizing some sectors over others) to find opportunities for higher returns. Beyond choosing the right sectors, active managers may also generate excess returns by picking individual stocks. Security-level performance dispersion across the global natural resource universe highlights the potential benefit of active management (Exhibit 3).

Passive investment strategies are typically centered on traditional approaches, such as market-capitalization-weighted indexes. In such cases, the largest stocks often exert the greatest influence (for better or worse) on overall returns. Bottom-up security selection, on the other hand, which pursues the most attractive investment opportunities—regardless of company size—offers another potential lever for index-beating returns.

In addition to the supply and demand dynamics of the underlying natural resources, which often determine the performance of the equities, excess returns can come from factors specific to each company, such as valuations, financial strengths or operational advantages.

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. Data represents the stocks held within the S&P Global Natural Resources Index. See endnotes for index definitions and additional disclosures.

Bottom-up   security selection, which pursues the most attractive investment opportunities—regardless of company size—offers another potential lever for index- beating returns.

Natural resource equity portfolios built according to traditional methodologies tend to concentrate assets in energy and, to a lesser degree, metals & mining. The result is considerable risk contribution from these volatile sectors. Single-sector approaches to resource investing, meanwhile, may be challenging for investors to position-size and maintain desired exposure. They also do not effectively capture the global demand opportunity for natural resources.

Recognizing the need for a smarter, more risk-aware global investment universe of natural resource equity companies, Cohen & Steers developed a risk-parity framework more than a decade ago (Exhibit 4). Our approach uses quantitative methods designed to dynamically weight the three core sectors of the asset class—energy, metals & mining, and agriculture-focused businesses—based on their respective contribution to overall risk.

This more “risk-efficient” approach, which upweights the less volatile agribusiness sector, offers what we believe is a better starting point for stock selection. It can help protect capital over the long term by mitigating outsized drawdowns while providing a better balance across sectors. For more on our risk-parity approach, see “A next- generation approach to natural resource equity investing,” available at cohenandsteers.com.

Key benchmark comparisons

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