3Q'17 Hard Assets Strategy Review
During the quarter, VanEck's hard assets strategy returned 8.37% (measured by the VanEck Global Hard Assets Fund, Class A (MUTF:GHAAX), excluding sales charge). On a relative basis, the strategy outperformed its commodity equities-based benchmark index, the Standard & Poor's® (S&P) North American Natural Resources Sector Index (SPGINRTR),1 which returned 7.41% over the same period.
The most significant impact on the natural resources market and the Fund came from the continued resilience of metals prices, in particular copper, which hit two-year highs during the quarter. Geopolitical risk, such as the tension between the U.S. and North Korea, resulted in a degree of hesitancy and sensitivity in the market to any type of perceived "risk on" environment although it was supportive of gold prices.
Fundamental: During the quarter, demand turned from resilient to strong on the back of synchronized global growth in both emerging and developed markets. At the same time, we saw a moderation in the growth rate of U.S. shale oil supply, reflecting the pause in the growth of the rig count that we saw earlier this year on the back of softer oil prices.
Technical: Energy as a whole performed moderately well during the quarter after what turned out to be one of the worst first halves ever for the sector. However, this performance was still not fully reflective of the longer-term stability in the market.
Macroeconomic: While supportive data indicate synchronization in global growth, concerns about geopolitical risk continue to overhang the market. As well, global inflation has remained surprisingly soft.
Natural Resources Sub-Sector Review
Energy: The combination of better than expected demand, moderating growth in U.S. shale supply, and the continuation of remarkable compliance within OPEC (Organization of Petroleum Exporting Countries) of its self-imposed production quotas have helped oil, perhaps, find an equilibrium price. Distillate inventories on a global basis - particularly in Europe, U.S., and Asia - have come down implying, most likely, fairly strong industrial demand with better economic growth around the globe providing confirmation. We see this as helping to rebalance the market.
Metals And Mining: Now armed with strong balance sheets and healthy margins, the global mining sector has been returning cash to shareholders. A case in point is Rio Tinto (NYSE:RIO), which, during the quarter, announced not only a generous interim dividend, but also that it would add $1B to the share buyback program it announced in February.
Gold producers continued to reiterate their commitment to capital discipline and maintaining low costs. Gold stocks generally carry yields well under 1%. It looks now as if the industry may be gaining the financial strength to offer yields that outperform gold's 0% yield which may attract more investors.
Agriculture: Despite mixed underlying commodity performance, agricultural equities saw strong performance in the third quarter. Protein markets have been strong all year and this quarter chicken pricing, particularly wings, was counter-seasonally strong while supply remained subdued. In addition, beef packing margins have been exceptionally strong. Fertilizer prices, which were weak in the second quarter, appear finally to have found a bottom.
Top Quarterly Contributors/Detractors
Source: FactSet; VanEck. Data as of September 30, 2017. Contribution figures are gross of fees, non-transaction based and therefore estimates only. Figures may not correspond with published performance information based on net asset value (NAV) per share. Past performance is not indicative of future results. Portfolio holdings may changes over time. These are not recommendations to buy or sell any security.
Outlook: Solid Growth In The Consumption Of Commodities In General
The synchronized global economic growth that we are currently experiencing is manifesting itself in solid growth in the consumption of commodities in general.
In the energy sector, in particular, International Energy Agency (NASDAQ:IEA) projections for growth in crude oil demand this year have steadily increased from 1.2 million barrels per day to 1.6 million barrels per day. Looking further ahead, its forecast for global crude oil consumption has demand exiting 2018 at 100 million barrels per day! In 2008, it was around 85 million barrels per day. So, demand has grown on average by 1.5 million barrels per day over 10 years in a period of relatively slow economic growth.
The energy industry is currently faced by two big themes right now: 1) A focus on efficient capital allocation and the return of capital to shareholders, and 2) the use of "big data" in advanced technologies that can introduce the next "step change" in drilling efficiency and profitability.
I recently took a trip down to Houston, Texas to visit a number of early-stage venture capital innovation incubators who, amongst other things, are focusing on data harnessing, advanced energy technologies, artificial intelligence, and predictive analytics. When I was there, I saw several companies that have the potential to dramatically advance well results by, for example, decreasing drill times. They want to prove not only that innovation is still possible, but also that exciting developments in cost-saving and efficiency continue.
One of the main pillars of our investment philosophy continues to be to look for long-term growth. Since we remain convinced that positioning our portfolio for the future and not just reacting to current circumstances is of paramount importance, our focus remains on companies that can navigate commodity price volatility and help grow sustainable net asset value.
1 The S&P North American Natural Resources Sector (SPGINRTR) Index (the "Index") provides investors with a benchmark that represents U.S. traded securities that are classified under the GICS® energy and materials sector excluding the chemicals industry; and steel sub-industry.
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