A Case for Natural Resources Investing

Transcription

1 ACTIVE INVESTMENT SOLUTIONS. Sector Case Study: A Case for Natural Resources Investing Rob Young, CFA, ICON Natural Resources (ICBMX) Portfolio Manager Key Takeaways: According to ICON s valuations and supported by potential thematic tailwinds, Natural Resources may be poised for a period of market leadership. Currently, we see attractive value in the Emerging Markets Energy and International Developed Markets Materials sectors. Within the Natural Resources sectors, macro or top-down level investors spend a lot of time analyzing the direction of commodity prices to make investment decisions. ICON s bottom-up valuation approach aims to cut through the day-to-day noise of the commodity environment with the goal of navigating both up and down commodity markets. The ICON Natural Resources Fund utilizes a proprietary valuation metric which attempts to find undervalued sectors and industries on a global basis. We believe sectors and industries go through a thematic rotation of leadership over time. ICON s disciplined valuation approach looks to capitalize on that thematic rotation and thereby allocate capital to where we see bargains.

2 ICON Advisers InvestwithICON.com Have Investors Forgotten about the Building Blocks of Economic Growth? Over the last nine calendar years, the Information Technology and Consumer Discretionary sectors have led the MSCI All Country World Index by nearly 70% cumulatively. In addition these sectors have been in the top three annual best-performing sectors two-thirds of those years. Natural Resources, primarily made up of equities from the Energy and Materials sectors, have told a different story, as they ve underperformed by roughly 30% cumulatively and only shown up in the top three best-performing sectors four years out of nine. Weakness has been more acute in the Energy sector, as it s been in the top three best-performing sectors only once and has been the worst sector in three of the last four years. (EXHIBIT 1) LOWEST RETURN HIGHEST RETURN EXHIBIT 1*: Natural Resources, particularly Energy, have lagged the MSCI All Country World Index Source: FACTSET The data quoted represents past performance, which is no guarantee of future results. * This chart does not represent the performance of any ICON product. A Case for Natural Resources Investing March

3 Part of the underperformance could be explained by commodity prices, as they have drastically underperformed the broad market (EXHIBIT 2). At ICON, predicting commodity prices is not our focus. Instead, we use bottom-up valuation analysis as a precursor to investment decisions. However, in the prior two instances where commodities significantly underperformed, they have dramatically outperformed over the following several years. EXHIBIT 2: Commodity Prices Relative to Equity Market - S&P GSCI Index/S&P 500 Index ( ) - Will history repeat? Average Ratio = Approx. 4 Gulf Crisis (1990) Oil Crisis (1973/1974) Global Financial Crisis (2008) March Dot.com Bubble Source: Bloomberg The data quoted represents past performance, which is no guarantee of future results. In the early part of the century, from 2000 to 2007, Natural Resources performed differently. The two primary component sectors, Energy and Materials, outperformed the broader market by more than double on the back of the Chinese infrastructure boom, while landing in the top three annual best-performing sectors seven times. Today, commodity-oriented companies have the stigma of being part of the Old Economy, associated with more traditional industries than the high-growth, technology-focused New Economy stocks. However, our disciplined, bottom-up valuation process, which removes daily headlines and macro sentiment, is telling us that those boring names may revive their market leadership position. 3 A Case for Natural Resources Investing March 2018

4 Calculating Value in Natural Resources At ICON, we employ a disciplined investment methodology, rooted in the fundamentals of finance, to compute intrinsic value. The output of this intrinsic value model is what we call value-to-price or V/P, our calculation of a stock s value as compared to its current market price. A company with a V/P of 1.20 implies that we believe it has 20% upside over the next 9-12 months. By way of this valuation technique, we aim to be disciplined, industry rotators that are non-emotional and tactical. Our value system creates an apples-to-apples platform, so that we can directly compare securities, industries or sectors across regions and markets. Since early 2016, we ve seen significant value within Emerging Markets Energy and International Developed Markets Materials (EXHIBIT 3). EXHIBIT 3: ICON s valuation framework currently favors Emerging Markets Energy and International Developed Markets Materials Energy Sector V/P ICON s Value System US Energy VP: 0.99 INTL Energy VP: 1.04 EM Energy VP: 1.13 ICON s V/P (as of 3/31/18) /2015 3/2015 5/2015 7/2015 9/ /2015 1/2016 EM Energy 3/2016 5/2016 7/2016 9/ /2016 Materials Sector V/P INTL Energy 1/2017 3/2017 5/2017 7/2017 9/2017 US Energy 11/2017 1/2018 3/2018 ICON s Value System US Materials VP: 1.04 INTL Materials VP: EM Materials VP: 1.02 ICON s V/P (as of 3/31/18) /2015 3/2015 5/2015 7/2015 9/ /2015 1/2016 3/2016 5/2016 7/2016 9/ /2016 EM Materials INTL Materials 1/2017 3/2017 5/2017 7/2017 9/2017 US Materials 11/2017 1/2018 3/2018 Source: ICON Advisers, Inc. The data quoted represents past performance, which is no guarantee of future results. A Case for Natural Resources Investing March

5 Over the last six months, we ve seen increasing value in the Emerging Markets Energy sector, and since early 16, earnings and credit spreads have broadly become more positive from a global standpoint, with Emerging Markets Energy standing out as the best performer. In addition, Emerging Markets Energy is the top sector performer YTD after trailing the broad Emerging Markets Index by nearly half from 2009 to Based on our valuation, we re expecting the Energy sector within Emerging Markets to continue outperforming the broader index as it re-establishes leadership. EXHIBIT 4: Emerging Markets Energy forecasts have become more bullish and credit spreads have tightened Graph 1: Bloomberg Estimate EPS (BEst EPS) MSCI EM Energy Sector Index MSCI ACWI Energy Sector Index S&P 1500 Energy Emerging Markets Energy forecasts have become more bullish and credit spreads have tightened despite volatility in Energy Commodities. EM Energy OAS EUR Energy OAS US Energy OAS Graph 2: Option Adjusted Spreads (OAS) Mar-2012 Jun-2012 Sept-2012 Dec-2012 Mar-2013 Jun-2013 Sept-2013 Dec-2013 Mar-2014 Jun-2014 Sept-2014 Dec-2014 Mar-2015 Jun-2015 Sept-2015 Dec-2015 Mar-2016 Jun-2016 Sept-2016 Dec-2016 Mar-2017 Jun-2017 Sept-2017 Dec-2017 Mar Source: Bloomberg The data quoted represents past performance, which is no guarantee of future results. From a qualitative standpoint, we see other potential tailwinds for Natural Resources going forward. We see positive themes surrounding developing Asia s infrastructure needs, which according to the Asian Development Bank are roughly $26 trillion, a figure that could be spent over the next 15 years. In addition, the global proliferation of ecommerce, China s supply side reform, and lastly, China s desire to increase natural gas consumption within its energy mix could all be positive forces for Natural Resources. In summary, according to ICON s valuations and supported by potential thematic tailwinds, Natural Resources may be poised for a period of market leadership. 5 A Case for Natural Resources Investing March 2018

6 ROB YOUNG, CFA is the Portfolio Manager for the ICON Industrials and Natural Resources Funds. He is also Co-Portfolio Manager of the ICON International Equity and Emerging Markets Funds, and is a member of the ICON Investment Committee. Important Information Fund Performance Data as of 3/31/2018 AVERAGE ANNUAL TOTAL RETURNS (%) TICKER INCEPTION YTD a 1 YR 3 YRS 5 YRS 10 YRS EXPENSE RATIO SINCE INCEPTION GROSSb NET b ICBMX ICON Natural Resources Fund, S 5/5/ % 1.51% S&P 1500 Index Morningstar Natural Resources a Not annualized. The data quoted represents past performance, which is no guarantee of future results. Investment return and principal value will fluctuate and shares, when redeemed, may be worth more or less than their original cost. Current performance may be higher or lower than the data quoted. Please call or visit for performance results current to the most recent month-end. Returns assume the reinvestment of dividends and capital gain distributions and reflect applicable fees and expenses. Performance without maximum sales charge does not include front-end or contingent deferred sales charges. Performance shown is for Class S shares. Performance for the Fund s other share classes will vary depending due to differences in sales charges and expenses. b ICON Advisers contractually agreed to limit the total expenses of the Fund (excluding interest, taxes, brokerage and extraordinary expenses) to an annual rate for Class S of 1.50%. This expense limitation may be terminated at any time after January 31, 2019 upon 30 days written notice to the Fund s Board of Trustees. ICON Advisers is entitled to reimbursement from the Fund of any fees waived pursuant to this arrangement if such reimbursement does not cause the Fund to exceed existing expense limitations and the reimbursement is made within three years after the expenses were reimbursed or absorbed. Gross Expenses are all customary expenses incurred by a Fund, excluding, where applicable, waivers, reimbursements, and contractually agreed to limits of the total expenses by the Fund s adviser. Net Expenses are all customary expenses incurred by a Fund, including, where applicable, waivers, reimbursements, and contractually agreed-to limits of the total expenses by the Fund adviser. The Net Expense Ratio may exceed the contractually limited expenses because of interest, taxes, brokerage, acquired fund fees and expenses,and extraordinary expenses not waived by the Adviser. There are risks involved with mutual fund investing, including the risk of loss of principal. There is no assurance that the investment process will consistently lead to successful results. An investment concentrated in sectors and industries may involve greater risk and volatility than a more diversified investment. There are risks associated with small- and mid-cap investing such as less liquidity, limited product lines, and small market share. An actively managed investment product does not guarantee better returns or performance than any other kind of investment. Investments in international securities may entail unique risks, including political, market,regulatory and currency risks. Financial statements of foreign companies are governed by different accounting, auditing, and financial standards than U.S. companies and may be less transparent and uniform than in the United States. Many corporate governance standards, which help ensure the integrity of public information in the United States, do not exist in foreign countries. In general, there is less governmental supervision of foreign stock exchanges and securities brokers and issuers. The risks of investing in international securities are greater for investments in emerging markets. Emerging market countries may experience greater social, economic, regulatory, and potential volatility and uncertainty than more developed countries. Opinions and forecasts regarding sectors, industries, companies, countries and/or themes, and portfolio composition and holdings, are all subject to change at any time, based on market and other conditions, and should not be construed as a recommendation of any specific security, industry, or sector. ICON s value-based investing model is an analytical, quantitative approach to investing that employs various factors, including projected earnings growth estimates and bond yields, in an effort to determine whether securities are over- or underpriced relative to ICON s estimates of their intrinsic value. ICON s value approach involves forward-looking statements and assumptions based on judgments and projections that are neither predictive nor guarantees of future results. Value readings are contingent on several variables including, without limitation, earnings, growth estimates, interest rates and overall market conditions. Although valuation readings serve as guidelines for our investment decisions, we retain the discretion to buy and sell securities that fall beyond these guidelines as needed. Value investing involves risks and uncertainties and does not guarantee better performance or lower costs than other investment methodologies. ICON s value-to-price ratio is a ratio of the intrinsic value, as calculated using ICON s proprietary valuation methodology, of a broad range of domestic and international securities within ICON s system as compared to the current market price of those securities. According to our methodology, a V/P reading of 1.00 indicates stocks are priced at intrinsic value. We believe stocks with a V/P reading below 1.00 are overvalued while stocks with a V/P reading above 1.00 are undervalued. For example, we interpret a V/P reading of 1.15 to mean that for every $1.00 of market value, there is a $1.15 of intrinsic value which has not yet been realized in the market price The unmanaged Standard & Poor s Composite 1500 (S&P 1500) Index is a broad-based capitalization-weighted index comprising 1,500 stocks of Large-cap, Mid-cap, and Small-cap U.S. companies. The unmanaged Standard & Poor s (S&P) 500 Index is a market value-weighted index of large-cap common stocks considered representative of the broad market. The Standard and Poor s (S&P) 1500 Energy Index is an unmanaged capitalization-weighted index comprising companies in the Energy sector as determined by S&P. The MSCI Emerging Markets Energy Index includes large and mid cap securities across 24 Emerging Markets (EM) countries. All securities in the index are classified in the Energy sector as per the Global Industry Classification Standard (GICS ). The MSCI ACWI Energy Index includes large and mid cap securities across 23 Developed Markets (DM) and 24 Emerging Markets (EM) countries. All securities in the index are classified in the Energy sector as per the Global A Case for Natural Resources Investing March

7 Industry Classification Standard (GICS ). The Morgan Stanley Capital International (MSCI) All Country World Index (MSCI ACWI) is a leading unmanaged benchmark of world equity market performance. The S&P GSCI Total Return Index in USD is widely recognized as the leading measure of general commodity price movements and inflation in the world economy. Index is calculated primarily on a world production weighted basis, comprised of the principal physical commodities futures contracts. Total returns for the unmanaged indexes include the reinvestment of dividends and capital gain distributions but do not reflect deductions for commissions, management fees, and expenses. Individuals cannot invest directly in an index. BEst EPS: The BEst (Bloomberg Estimates) Earning Per Share (EPS Adjusted) estimate returns Earnings Per Share from Continuing Operations, which may exclude the effects of one-time and extraordinary gains/losses. A credit spread is the difference in yield usually between two bonds of similar maturities but different credit quality. Widening credit spreads typically indicate growing concern about the ability of borrowers to service their debt. Narrowing credit spreads typically indicate improving creditworthiness. It is often an indication of the risk premium for one investment product over another. Option Adjusted Spread (OAS ) is a methodology using option pricing techniques to value the embedded options risk component of a bond s total spread. Embedded options are call, put or sink features of bonds. The Morningstar Natural Resources category average includes natural-resources portfolios that focus on commodity-based industries such as energy, chemicals, minerals, and forest products in the United States or outside of the United States. Some portfolios invest across this spectrum to offer broad natural-resources exposure. Others concentrate heavily or even exclusively in specific industries. Portfolios that concentrate primarily in energy-related industries are part of the equity energy category. The Fund s composition may differ significantly from the indexes. Individuals cannot invest directly in an index. The Morningstar information contained herein is 2018 Morningstar, Inc. All rights reserved. The Morningstar information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete, or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Consider the investment objectives, risks, charges, expenses, and share classes of each ICON Fund carefully before investing. The prospectus, summary prospectus, and the statement of additional information contain this and other information about the Funds and are available by visiting com or calling Please read the prospectus, summary prospectus, and the statement of additional information carefully before investing ICON Distributors SM, distributor. All Rights Reserved. ICON Advisers InvestwithICON.com 5299 DTC BLVD, Suite ICON Advisers Greenwood Village, CO Nat.Resources_wp (5/18)