The pickup in the global economy has enabled the natural resources sector to achieve strong gains, as Nick Sudbury reports
The global stimulus measures put in place at the beginning of 2009 had the desired effect of jump starting the world economy back into growth. Much of this extra liquidity has found its way into real assets with one of the major beneficiaries being the natural resources sector.
Most of the ETFs that invest in this area have only been around for a year or so with the majority making strong double digit gains. It is a diverse part of the market that offers exposure to anything from global water to energy stocks and basic materials providers to agribusiness.
“The returns from natural resources ETFs are dependent on the state of the global economy and investors will benefit more as the economy recovers,” says Nizam Hamid, head of sales strategy at iShares Europe.
One of the best performers in the last 12 months was the iShares S&P Timber & Forestry ETF, which was up around 45%. It is quoted on various exchanges and available with different base currencies, including a sterling version listed on the London Stock Exchange. The fund has a total expense ratio (TER) of 0.65% and a dividend yield of 1.26%.
The benchmark is made up of the 25 largest and most liquid listed companies from around the world that are involved in the ownership, management or the upstream supply of forests and timberlands.
“The timber and paper industry is one of the leading economic indicators of an early cyclical recovery. This makes it an interesting theme for investors who want to make a tactical sector investment,” explains Hamid. “The ETF provides liquid, transparent access to the timber and forestry sector, which is not easily available directly or through other investment vehicles.”
The majority of products in the sector are structured as ETFs, although there are also a few exchange-traded notes (ETNs). One such is the JP Morgan Alerian MLP Index ETN, which trades on NYSE Arca under the ticker AMJ. This has a market value of over one billion dollars and has been a strong performer, with a 42.8% return in the last year.
Scott Mitchell, an executive director within the equity derivatives group of JP Morgan, says ETNs are debt securities of the issuer, whereas ETFs are funds. “ETF investors have a direct claim on the assets in the fund, while ETN investors take exposure to the credit risk of the issuer, which in this case is JP Morgan.”
The main reasons for offering AMJ as an ETN are that the returns are less subject to tracking error and investors are not required to file K-1 forms. This simplifies the administration burden on those who invest in it.
The note tracks an index of Master Limited Partnerships, which are listed firms trading on US exchanges. Most operate in the energy infrastructure industry and own vital assets such as pipelines or storage facilities. These businesses tend to pay high quarterly distributions, which is why the ETN is currently offering an attractive variable yield of 6.3% per annum.
“AMJ tracks the Alerian MLP index, which is the recognised benchmark for the MLP industry. MLPs have been expanding to meet the growing need for energy infrastructure in the US and the quarterly distributions have been attractive to investors looking for yield alternatives,” explains Mitchell.
One provider with a range of thematic investments in this area is EasyETF. The idea behind these products is to capture the opportunities coming out of key global trends like population growth, the increased demand for energy and environmental issues. Examples include EasyETF BNP Paribas Global Water, which is up 30% in the last year and the Global Waste Management equivalent that had a return of 28%.
The Global Water product synthetically replicates the return from an international portfolio of up to 25 stocks from the water sector. BNP Paribas makes the final selection based on the market cap, share price performance and the nature of its operations, be it distribution, treatment or infrastructure. It is a small fund with a value of just €14.6m.
EasyETF BNP Paribas Global Waste Management uses the same methodology to provide exposure to a portfolio of 15 waste management companies. The largest holdings are based in the US.
Danièle Tohmé-Adet, head of development, ETF and indexed funds at BNP Paribas Asset Management, says these are new sectors that are forecast to benefit from high investment flows in the next few years. “There are numerous essential projects in waste and water management going on around the world. Most of the underlying companies involved in these activities will see their growth potential increase dramatically.”
Socially responsible investing
Research conducted on behalf of the UK Sustainable Investment and Finance association (UKSIF) has found that half of British investors want to do more than just make money. Wherever possible they also want their holdings to make a difference in the world, assuming they can achieve both at the same time. This is particularly relevant when considering an investment in natural resources.
Penny Shepherd, chief executive of UKSIF, says that the appropriate use of natural resources and renewable energy can make a real difference. “Some people prefer not to invest in extractive industries at all. Others are more pragmatic and accept that it is going to take place and want it done by a listed company that is accountable to its shareholders.”
Across Europe 94% of Socially Responsible Investment (SRI) managed assets are owned by institutional investors such as pension funds, although the real pioneers in this area have been the high net worth individuals. At the end of 2008, eight percent of these people had some sort of SRI exposure in their portfolio, but this figure is thought to have increased to 12% at the end of last year.
“One of the specific challenges for natural resources ETFs is whether the index is designed to address SRI issues and to deliver performance,” says Shepherd. “Responsible investors are also more likely to be attracted to fully replicated ETFs that invest in the underlying companies, rather than those that use derivatives, because of the long-term ownership dimension.”
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