At the start of 2020, There was more money flowing into natural resource funds than ever before. The majority of that capital was being taken by mega funds covering the breadth of infrastructure investing.
Activity among pure natural resources funds has not noticeably increased. What’s more, the majority of capital flowing into pure natural resources funds has been dedicated to North American energy projects, when the value proposition in that sector is more difficult than at any time since the start of the shale gas boom.
However, in a report by alternative asset class info provider Preqin, three months into the year the asset class is facing some of its biggest challenges. A new war of attrition within OPEC has sent oil prices spiraling below $30 a barrel, and the COVID-19 pandemic – with its huge impact on economic activity and transportation especially – has spawned an almost unprecedented level of market volatility.
Preqin asked . How can fund managers expect to achieve the returns they may have banked on even one quarter ago? And how can they keep attracting investor interest and capital when the energy industry faces such paroxysms?
The answer seems to be alternatives within the natural resource space. The firm said it had seen a spike in the past quarter for these assets, as some institutions look to move beyond a pure-energy approach to the sector. It may be that challenges in the energy market will offer these alternative approaches a chance to prove themselves to investors.
Preqin found that The fund searches and mandates issued by natural resources investors in Q1 2020 suggest a more cautious approach to the coming year. The majority (53%) of fund searches are for commitments of less than $50mn to the asset class (Fig. 7). That said, more investors issued mandates for larger sums of capital in Q1 2020 than in Q1 2019. In a time of extended public market volatility, this could be a sign that investors are becoming more comfortable with natural resources as the need to diversify their portfolios becomes ever more pressing.
Meanwhile, appetite for both water and agriculture/farmland funds has increased in comparison with one year ago. Water strategies represented 12 percent of all searches in Q1 2019, a proportion that increased by more than any other strategy to 22 percent in Q1 2020.
Given that the last decade saw equities products lead both the open and closed-ended fund space, perhaps given the extreme volatility seen since COVID caused havoc for the markets, commodities might now have their chance to lead the way in the funds league.
