[GMO] An Investment Only A Mother Could Love


[GMO White Paper] An Investment Only A Mother Could Love: The Case For Natural Resource Equities (Lucas White, Jeremy Grantham) – September 2016

  • Believe prices of many commodities will rise in the decades to come due to growing demand and finite supply of cheap resources
  • Public equities great way to invest in commodities and allow investors to gain commodity exposure in a cheap, liquid manner; harvest equity risk premium; avoid negative yields associated with rolling futures contracts
  • Diversification relative to broad equity market and diversification benefits increase over longer time horizons
  • Protection against inflation historically but have actually significantly increased purchasing power in most inflationary periods
  • Commodity producers tend to trade at a discount and have outperformed the broad market historically – based on a composite of valuation metric composed of price to normalized earnings, price to book value, and dividend yield, commodity producers have traded at around a 20% discount to the S&P 500 on average since 1920s; despite recent pain, energy and metals basket has outperformed the broad market by more than 2% per annum over the past 90 years or so
  • While volatile and exhibit drawdowns in the short-term, have been remarkably safe investments over longer periods of time – while oil prices have risen just slightly in real terms since 1920s, oil and gas companies have generated real returns of more than 8% per year
  • Despite all of this, investors generally don’t have much exposure to resource equities; S&P 500’s exposure to energy and metals has dropped by more than 50% over the last few years and the same is true of the MSCI All Country World Index; value managers tend to be especially averse to the risks posed by commodity investing
  • Private equity shares many benefits of its public brethren but high fees and risks associated with identifying right private equity managers
Image Source: GMO White Paper (September 2016)

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