The Commodities & Natural Resources sector is booming, and our columnist believes a trio of top performers have a lot to offer.
Petrol shortages are maddening for motorists but supply squeezes and soaring oil prices are good news for shareholders in ‘Commodities & Natural Resources’ investment trusts. The top-performing big fund in this sector has pumped up returns of 57% over the last year, but its shares continue to trade 29% below their net asset value (NAV). That's a bargain you won't find on any forecourt, no matter how long you wait.
This reflects a remarkable bounce-back since wholesale oil prices briefly became negative - yes, that's right, less than zero - in April last year. Now the investment bank Goldman Sachs predicts oil will rise from its current price of $80 per barrel to hit $90 before the end of this year.
The explanation is that while most people remain focussed on bad news in the present and recent past, money markets are in business to discount the future - and they expect economic activity and energy demands to rise soon.
- Scottish Mortgage and the world's most attractive growth firms
- Find more investment trusts to suit your goals
- Top-performing fund, investment trust and ETF data: September 2021
That has prompted the Association of Investment Companies (AIC) ‘Commodities & Natural Resources' sector to surge 42% higher over the last year. Riverstone Energy (LSE:RSE) is leading the charge among big investment trusts, it has total assets of more than £414 million and the eye-stretching returns mentioned above. Launched in 2013, it aims to "achieve superior risk-adjusted after-tax returns by making privately negotiated investments in the exploration and production (E&P), midstream, services and power sectors”.
BlackRock Energy & Resources Income (LSE:BERI) is not far behind with a total return of 51% over the last year plus - unlike RSE, which pays no dividend - a yield of 4.6%. CQS Natural Resources Growth & Income (LSE:CYN) has done even better, with total returns of 58% and a yield just above 4%, but is more dependent on digging than pumping. It aims for “capital growth and income predominantly from a portfolio of mining and resource equities”.
All three investment trusts are benefiting from a growing belief that the worst of the coronavirus crisis may now be behind us, as rising vaccination levels in the developed world enable economic recovery to gain momentum. If that is correct, energy demand and prices are likely to continue rising.
This long-term shareholder in Royal Dutch Shell (LSE:RDSB) certainly hopes so. After April last year’s bombshell, when it cut its dividend for the first time since World War Two, RDSB has had a torrid time but the shares have bounced by 11% in the last week; 19% in six months and 64% over the last year.
Richard Hayden, chairman of RSE, pointed out: “Increased economic activity and rising oil demand helped push the West Texas Intermediate (WTI) price up by 70% in the first half of this year, compared to a year ago. While demand remains below pre-pandemic levels, a disciplined approach from the Organisation of Petroleum Exporting Countries (OPEC) in unwinding the cuts made at the height of the crisis has helped support prices.
“At the same time, new variants threaten to slow or reverse the recovery. Attempting to predict how the next few months will play out, let alone the year ahead, is challenging.”
- Five things investors must know about Britain’s energy crisis
- Forecasts for gas prices, Petrofac and Rolls-Royce
- Take control of your retirement planning with our award-winning, low-cost Self-Invested Personal Pension (SIPP)
The investment bank, Goldman Sachs, is more bullish. In addition to predicting Brent Crude will rise from its current level of $80 per barrel to $90 by the end of this year, it forecast WTI will rise from its current level of $76 to $87 a barrel. The bank’s strategist added: "While we have long held a bullish oil view, the current global supply-demand deficit is larger than we expected.”
Hard though it may be to believe now, but on 20 April 2020, oil prices briefly became negative, when WTI futures for the following month collapsed to close trading in New York at minus $38 per barrel. The explanation was that the cost of storing the stuff exceeded what anyone was willing to pay to buy it.
But futures contract prices are even more volatile than petrol. Diminishing risk by diversification across a range of assets in a global portfolio is a much less risky way to seek rewards from the rising price of oil.
BERI, CYN, RSE and even RDSB show what can be achieved. It might be time to pop some in your tank. Better still, there’s no need to queue.
Ian Cowie is a shareholder in Royal Dutch Shell (RDSB) as part of a globally diversified portfolio.
These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.