Top-Rated Funds for Commodities Exposure

For investors seeking indirect exposure to commodities, these equity funds have attracted our top qualitative ratings

Holly Cook 14 September, 2011 | 4:12PM
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Investing in commodity-related equities is an alternative way to gain exposure to commodities, with funds in these sectors focusing on companies that extract commodities rather than direct, physical exposure, such as miners and E&P firms. The huge growth in demand commodities investments as investors seek new ways to tap into global demand for natural resources has led to substantial growth in the direct and indirect commodities funds sectors. This growth was exemplified when, in April of last year, Morningstar split its relevant equities fund category into three. Morningstar’s three equity sector categories for open-end funds—energy, natural resources, precious metals—provide further granulation and enable better and clearer comparison of the funds on offer.

With three categories to choose from, investors can search, research and select those funds that more accurately fit their criteria. Note, however, that funds within either of these categories can have very different approaches to investing in commodities-linked companies. It is therefore important for investors to understand exactly what is on offer and, importantly, how much risk is being taken in each fund. Commodities categories are among the equity market’s most volatile, with many unpredictable factors affecting the value of the commodities that make up the bulk of these funds. This emphasises how critical it is for investors to take a long-term view when investing in these sectors.

Morningstar’s Fund Screener and Fund Compare tools are useful tools for identifying suitable investments. Below are some of the top funds in each category, as rated by Morningstar Fund Research, and excerpts from their respective analyst reports. Morningstar Research is available to Premium subscribers.

Sector Equity Energy
BGF World Energy (Superior)
We remain confident that BGF World Energy is an attractive offering for investors seeking exposure to energy stocks, given its experienced managers and robust process. Despite the volatility, the strong team and thorough process, coupled with proven long-term returns, argue in the fund’s favour.

Investec Global Energy (Superior)
We have a high opinion of the managers’ investment ability, including the in-depth nature of their company analysis that supports their relative value positioning across the universe. This is complemented by their strong knowledge and understanding of energy markets.

Schroder ISF Global Energy (Superior)
We think this is one of the best energy funds in the category—it carries risk but it’s a sound choice for the right investor. The unique investment process is well-executed and offers something different from the many other energy-sector funds that are currently available.

Sector Equity Natural Resources
BGF World Mining (Elite)
This fund is a compelling offering for investors seeking exposure to the mining sector. There are many factors in the fund’s favour, notably the strong team and robust process.

First State Global Resources (Superior)
The focus on quality means that we wouldn’t expect the fund to be among the top performers when resources are running hot. However, the team's concentration on long-term fundamentals has worked well for investors.

JPM Natural Resources (Superior)
We think JPM Natural Resources is a standout resources fund, but we stress that investors must be able to withstand its risks.

Martin Currie GF Glbl Resources (Superior)
Although it has an unusual approach, the strategy here is well-thought-through and suits investors wanting a more diversified and lower-risk exposure to resources.

Sector Equity Precious Metals
BGF World Gold (Elite)
We think this is a high-quality way to invest in gold equities in a risk-controlled manner.

BlackRock Gold and General (Elite)
We aren't fans of sector funds in general, but for those seeking gold and metals exposure, this is still one of the best offerings.

Craton Capital Precious Metal (Superior)
This fund offers a proven strategy for smaller-cap precious metals stocks. The fund has an experienced manager with an established investment approach and good team support.

A ‘Wild Card’
Though not a natural resources-classified fund, M&G Global Basics is also worth a mention here. The fund falls into Morningstar’s Global Small-/Mid-cap Equity category but like some of the funds mentioned above it invests in a lot of commodity-dependent companies. At last check, the fund held over 45% of portfolio assets in the industrial materials sector and more than 15% in energy. With manager Graham French winning Morningstar’s Fund Manager of the Year - Global Equity with this fund back in March, and the fund house snapping up the Outstanding Investment House honour from OBSR, a Morningstar company, for a second year running last week, investors could do worse than check out this Elite-rated global equity offering.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Holly Cook

Holly Cook  is Manager, Morningstar EMEA Websites