Dramatic turnaround for Commodities & Natural Resources sector

Sector is top-performing over past year with 116% return.


Commodities & Natural Resources is the top-performing investment company sector over the past year with an average return of 116%, following two years of negative returns.1 Commodities have a key role to play in the global recovery and transition to a greener future but they could also be well placed to protect portfolios from rising inflation.

How are investment company managers viewing the prospects for higher inflation, how do they approach ESG and which commodities have the brightest prospects? The Association of Investment Companies (AIC) has spoken to investment company managers about their commodities holdings.

Outlook for commodities

Alasdair McKinnon, Manager of the Scottish Investment Trust, said: “Demand for virtually all commodities is likely to rise as the global economic recovery gets underway. The pace and durability of that rebound is still being underestimated by many investors in our view. Stimulus, such as the US’s proposed infrastructure plan, only adds to the appetite for raw materials. We see these factors as adding to overall inflationary pressures.”

Olivia Markham, Co-Manager of BlackRock World Mining Trust, said: “We believe inflation expectations will rise further this year which historically has been supportive for commodities. Mined commodities, such as iron ore and copper, have performed very well over the past 12 months and prices are at strong levels today. We’re optimistic that prices can be maintained at higher-than-expected levels for longer, particularly with governments around the world gearing stimulus packages towards infrastructure spending, which tends to be commodity intensive. We see the best risk-adjusted opportunity today in the shares of mining companies which are well positioned to generate robust free cash flow in the current environment.”

Rob Crayfourd, Co-Portfolio Manager of CQS Natural Resources Growth and Income, said: “The general demand outlook looks strong with extensive government stimulus and infrastructure plans, whilst pent-up demand from COVID reopening will further add to this. Years of low investment into new projects across all aspects of mining and energy give little flexibility for a supply response in the near term. An increased focus on ESG and general environmental aspects will extend this timeline further. We continue to see good producer discipline from current management teams. After the extended period of downturn investors are heavily focused on management teams not overbuilding capacity again, preferring to see debt paydown, buy-backs and dividends.”

Which commodities are you most optimistic about?

Keith Watson, Co-Portfolio Manager of CQS Natural Resources Growth and Income, said: “Copper is the easiest and cleanest fundamental story, with an added driver of a focused investment in clean energy, electric vehicles and emissions as a major theme in government stimulus plans. Copper can’t be displaced through technological advancements as the inputs to a battery could be, reducing the risk of any shocks to the thesis. Copper is also the second-best conductor after silver, which is prohibitive in cost for general applications. It also has one of the longest supply response timelines for adding new projects, with multi-year or longer construction periods. The one downside is this is a heavily consensus trade, which is always uncomfortable, but we think justified in this case.”

Mark Hume, Co-Manager of BlackRock Energy and Resources Income Trust, said: “Oil-related companies account for over 30% of the portfolio today. Whilst we’re not expecting Brent oil prices to move up significantly from current levels, we are optimistic that prices between $60 and $70 per barrel are sustainable. Prices remaining in that range should help drive a re-rating for energy shares, in our view, with them having de-rated significantly versus broader equity markets in recent years.”

Alasdair McKinnon, Manager of the Scottish Investment Trust, said: “We believe that gold is one of the most underappreciated commodities as, at a minimum, it should maintain its purchasing power at a time of monetary and fiscal largesse. Furthermore, it represents the ‘anti-bubble’ to the current Bitcoin bonanza. Gold’s value has endured through millennia and it comes into its own when inflation builds.”

Which commodities in your portfolio will benefit most if inflation rises?

Rob Crayfourd, Co-Portfolio Manager of CQS Natural Resources Growth and Income, said: “There is a cause and effect scenario here, where commodities are a significant input for the inflation we are seeing. Other than oil, which can have a material knock on the global economy if prices get too high, we believe higher prices in most other commodities can be absorbed. Gold and copper would be two we point to, but ultimately in an inflationary environment all real assets should continue to see interest.”

Olivia Markham, Co-Manager of BlackRock World Mining Trust, said: “Our analysis shows oil and copper as having the strongest correlation with inflation expectations. Importantly for us, natural resources equities have typically performed very well in absolute terms and relative to broader equity markets during periods in which inflation expectations rise significantly.”

Alasdair McKinnon, Manager of the Scottish Investment Trust, said: “The prospect of rising inflation still divides opinion. However, it seems to be a necessary evil as the world emerges from the pandemic. Inflation chips away at the real value of governments’ massive debt piles and central banks appear willing to tolerate above-average price rises. Gold should be a winner in this environment.”

How do you approach ESG?

Keith Watson, Co-Portfolio Manager of CQS Natural Resources Growth and Income, said: “Mining investors have long focused on ESG aspects, as they are key to ensure the company maintains its license to operate. This is clearly environmental, but also ensuring all stakeholders, including the government and local population, are looked after. The social benefits of mining, providing schools, healthcare and training, often in remote parts of the world, generally feels underappreciated. Whilst miners aren’t typically the top of many people’s lists of ESG plays, we would argue they should be.

“The ESG focus from the investment community has shifted from being anti any polluters, to how do we do this better and encourage positive change. Renewables and electric vehicles can’t happen without production of the materials used in their construction. Whilst China isn’t ESG-focused in the same way, they are increasingly environmentally (E) focused, with air quality the main concern. This is combining on a global scale to further constrain new supply and lifting costs for existing producers, where better practices are required. Against the backdrop of increasing demand for electrification inputs, this points to a tighter supply-demand balance that should continue to support prices.”

Alasdair McKinnon, Manager of the Scottish Investment Trust, said: “Many miners realise that their social licence to operate depends on their relations with the various stakeholders and, as such, they have a very strong focus on ESG. Discipline within the sector has improved markedly over the last decade and that extends to ESG matters. We believe that some gold miners are showing strong leadership here and those that do will gain increasing recognition from investors.”

Recent portfolio activity

Mark Hume, Co-Manager of BlackRock Energy and Resources Income Trust, said: We added to our energy exposure towards the end of 2020, rotating approximately 10% of the portfolio back into energy. This decision was based on the view that successful vaccine trials had removed the worst-case scenario for 2021 global oil demand and this decision has proved beneficial to the trust’s performance so far in 2021.”

Rob Crayfourd, Co-Portfolio Manager of CQS Natural Resources Growth and Income, said: “Gold miners have been out of favour for the last few months, which is not surprising given gold’s pull back, although on a valuation basis they are generally pricing in lower than current spot prices which appears overdone as they offer strong cash returns. As a result we have rotated back slightly more in that direction. Gold is more of a sentiment commodity than the other supply-demand commodities, but we see many reasons to be constructive as we come out of COVID lockdowns. With increased government debt levels, there are likely to be pockets of stress.”

Top-performing investment company sectors to 31 March 2021 ex VCTs

Performance measure

% share price total return

% share price total return

% share price total return

% share price total return
















Overall weighted average ex VCTs





AIC sector


Commodities & Natural Resources





European Smaller Companies





China / Greater China










UK Smaller Companies





Country Specialist





North America















Asia Pacific





Source: AIC/Morningstar. Sector performance is the peer group weighted average. N/A denotes a timeframe where there were fewer than three constituents.


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Notes to editors

  1. 116% is the share price total return of the weighted average Commodities & Natural Resources investment company sector from 1 April 2020 to 31 March 2021. For the previous year (to 31 March 2020) the sector’s return was -51% and for the year before that (the year to 31 March 2019) it was -10%.
  2. The Association of Investment Companies (AIC) was founded in 1932 to represent the interests of the investment trust industry – the oldest form of collective investment.  Today, the AIC represents a broad range of closed-ended investment companies, incorporating investment trusts and other closed-ended investment companies and VCTs. The AIC’s members believe that the industry is best served if it is united and speaks with one voice. The AIC’s mission statement is to help members add value for shareholders over the longer term. The AIC has 361 members and the industry has total assets of approximately £237 billion.
  3. Disclaimer: The information contained in this press release does not constitute investment advice or personal recommendation and it is not an invitation or inducement to engage in investment activity. You should seek independent financial and, if appropriate, legal advice as to the suitability of any investment decision. Past performance is not a guide to future performance.  The value of investment company shares, and the income from them, can fall as well as rise.  You may not get back the full amount invested and, in some cases, nothing at all.
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