An allocation to natural resource equities offers the potential for attractive returns and inflation protection, often used as a portfolio diversfier due to low historical correlations with stocks and bonds.
Equity investments tied to valuable real assets. Natural resource stocks represent ownership interests in companies that produce tangible assets linked to critical and often depleting commodity-related resources, with barriers to supply driven largely by capital intensity requirements.
Low correlations with traditional stocks and bonds. Natural resource equities’ correlation history with broad stock and bond markets indicate the potential to achieve results that are not tied to other securities or debt instruments, providing potential diversification benefits. Moreover, the asset class has tended to outperform in periods when stocks and bonds simultaneously underperformed their long-term averages
Increased inflation sensitivity. Similar to other real assets categories, returns for natural resource equities have shown attractive levels of sensitivity to unexpected changes in inflation.
Opportunities to gain value through active management. Natural resource equities have historically been impacted by recurring and significant asset-specific fundamental and event risks that can affect long-term values. Understanding the supply and demand economics of the underlying natural resources can play a large role in determining which stocks have outperformance potential at any given time.
Balanced sector allocations can mitigate risk. Because energy- and mining-related companies comprise a large share of the asset class, natural resources strategies with a carefully constructed sector approach can have beneficial risk-reward profiles compared with passive or capitalization-weighted approaches. At the same time, it is our view that strictly equal-weighted approaches can also result in sub-optimal sector allocations from a risk-reward perspective.
A prospective complement to commodities investing. Historically, natural resource equities have shown a lead/lag relationship with the economic cycle, while commodity prices respond more directly to near-term economic activity. For one, this means equities tend to outperform the underlying commodities early in the investment cycle when a recovery is anticipated. Also noteworthy is that the stocks offer access to subsectors not available in commodities futures, such as iron ore, coal, potash and uranium.
The views and opinions are subject to change without notice and represents an assessment of the market environment at a specific point in time, should not be relied upon as legal, investment or tax advice and is not intended to predict or depict performance of any investment. We consider the information to be accurate, but we do not represent that it is complete or should be relied upon as the sole source of suitability for investment. Investors should consult their own advisors with respect to their individual circumstances.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. There is no guarantee that a market forecast made in this commentary will be realized.
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Risks of Investing in Natural Resource Equities
The market value of securities of natural resource companies may be affected by numerous factors, including events occurring in nature, inflationary pressures and international politics. Because the strategy invests significantly in natural resource companies, there is the risk that the strategy will perform poorly during a downturn in the natural resource sector.
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