Following a period of suppressed commodity prices, natural resources funds have struggled in recent years to deliver favourable returns in comparison to other asset classes. Preqin’s Natural Resources Online features quarterly cash flow transactions and NAVs reported for 446 individual unlisted natural resources funds. Using this, we can compare the average returns earned by investors in their natural resources portfolios, based on the actual amount of money invested in each partnership. These returns are compiled and aggregated into the PrEQIn Natural Resources Index and compared against a public market equivalent, the S&P Global Oil Index TR.
As at 30 June 2016 (the most recent data available), the PrEQIn Natural Resources Index had witnessed its first increase in a year, rising 5.6 points to 116.4 and representing the second largest quarterly increase since the end of 2007. Natural resources funds continue to outperform the S&P Global Oil Index TR, which stands at 79.0 as at 30 June 2016. The gap between the two indices has generally widened since June 2014, illustrating how the decline in oil prices had more of an impact on the public market than on unlisted funds.
The latest recovery in the PrEQIn Natural Resources Index marks a stark difference from its performance over the past two years. Commodity price declines from June 2014 drastically impacted the performance of natural resources funds from that same year: the index gradually fell 25.1 index points from 135.9 in Q3 2014 to 110.8 in Q1 2016. Investors were understandably concerned about the impact of this on their portfolios – 62% of investors surveyed for the H1 2016 Preqin Investor Outlook stated that their natural resources investments had fallen short of expectations in 2015, compared with just 2% that felt returns had exceeded expectations.
However, the longer-term outlook for the industry appears more encouraging compared to a year ago: 26% of investors surveyed for the H1 2017 Preqin Investor Outlook said they expect to commit more capital over 2017 than they did in the previous 12 months, with a further 52% looking to maintain their commitments. The majority of investors appear to be taking a long-term attitude towards the asset class rather than pulling back in the face of relatively short-term commodity price fluctuations. OPEC’s decision to curb the supply of crude oil should also help dampen volatility in markets, boding well for natural resources fund managers looking to deploy capital in the year ahead.