The JPMorgan Natural Resources Fund has been removed from the Wealth 150 list of our favourite funds across the major sectors. It was added in May 2005 and initially performed well, but recent performance has been disappointing.
Large investments into Chinese infrastructure helped prompt a surge in demand for commodities between 2002 and 2010. The increased demand pushed up prices, providing a boost to the earnings of commodity companies. The fund's price peaked in late 2010 as earnings growth was reflected in company share prices.
The mining sector reacted to higher prices by investing in new projects. However, it takes significant time and capital expenditure to set up a new mine, and the increase to supply arrived just as demand from China became more subdued. Demand from China is vital to commodity prices; for example they account for around 60% of global iron ore and 45% of global base metal consumption (base metals are widely used for industrial purposes and include copper, iron, aluminium, tin, nickel and zinc). As the supply of commodities outweighed demand, prices fell, negatively affecting company earnings.
Neil Gregson assumed management of the fund in February 2012, one year into a prolonged period of falling commodity prices. While it has undoubtedly been a difficult environment for the fund, we have been disappointed by its performance. Over his tenure, the fund has fallen 46.4%* compared with -30.1%** for the Euromoney Mining, Gold & Energy Index although this should not be seen as an indicator of future returns. Our analysis suggests the fund's underperformance can largely be attributed to the manager's stock selection.
According to the manager, the prolonged period of low commodity prices has caused many companies to delay or cancel investment into new projects and has bankrupted many high-cost producers, reducing the level of supply. He therefore feels small improvements in demand could have a significant positive effect on commodity prices.
Past performance is not a guide to future returns. *Lipper IM to 01/05/15
|Annual percentage growth|
| May 10 -
| May 11 -
| May 12 -
| May 13 -
| May 14 -
|JPM Natural Resources A Acc||23.62%||-23.8%||-27.36%||-1.9%||-15.88%|
|Euromoney Global Mining Gold & Energy Index||20.4%||-14.5%||-14.5%||-4.8%||-3.9%|
As our quantitative analysis of commodity-focused funds has become more sophisticated over time, we have found that, according to our research, few managers in these areas have the ability to consistently add value for investors. We have removed the JPMorgan Natural Resources Fund from the Wealth 150 as we have lost conviction in the manager's ability to outperform over the long term.
Many companies in the energy, mining and resources sectors trade on low valuations, so any sustained rebound in commodity prices could see these companies share prices recover. The JPMorgan Natural Resources Fund, similar to many specialist funds, is one way to access this niche area, other alternatives include ETFs.
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