Second Quarter 2020

The Global Resources Fund had a total return of 38.21 percent in the second quarter of 2020, significantly outperforming its benchmark, the S&P Global Natural Resources Index, which returned 20.47 percent. See complete fund performance here.

In general, commodity prices were in recovery mode following the extreme selloff in the first quarter. Crude oil was able to rally nearly 32 percent, reaching $40 per barrel, but it wasn’t enough to change the fortunes of the industry. Natural gas slid another 11.48 percent for the second quarter, keeping life for frackers unprofitable. Copper rallied 21.94 percent as indications from China showed that the country was a strong buyer of the metal coming out of its virus lockdown.

Past performance does not guarantee future results. Current performance may be higher or lower than the performance data quoted. The principal value and investment return of an investment will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost.

Strengths

  • The three best performing commodities were lumber, crude oil and silver, up 44.30 percent, 31.82 percent and 30.29 percent, respectively. Overall, most commodity prices bounced back from the March lows, where the selloff hit peak intensity. Surprisingly, lumber also benefited from stay-at-home construction do-it-yourself projects as some suppliers ran out of treated lumber for building decks. Crude oil rallied hard after seeing negative pricing for West Texas Intermediate (WTI), the American benchmark, with buyers unable to take delivery into storage. During the rally the fund purchased the Direxion Daily S&P Oil & Gas Explorers and Producers Bull 2X Shares ETF (GUSH), which has leveraged exposure to oil and gas companies, and gained 74.86 percent, yielding the fund 89 basis points to the fund’s return. Silver finally rallied this quarter, perhaps signaling the broadening out of the precious metals trade.
  • The best sector performance, relative to the benchmark, came from our overweight positions in precious metals, an underweight in integrated oil and market weight in other metals/minerals. Our overweight position in precious metals represented 22.63 percent of the fund, averaging a weighted 76.78 percent gain relative to the benchmark. This, coupled with better stock picking, yielded the fund 696 basis points of outperformance. For other metals and minerals, the fund was essentially benchmark-weighted at 16.00 percent, versus the benchmark’s 15.71 percent. However, the fund had superior stock selection with gains yielding a weighted return of 54.89 percent, versus the benchmark at 33.64 percent.
  • The fund had a significant underweight position in integrated oil companies, 8.70 percent versus the benchmark’s 21.53 percent. Stock picking was also superior, with our picks averaging a return of 24.70 percent versus the benchmark at only an 8.46 percent gain. Total allocation and stock picking yielded the fund 307 basis points of outperformance.

Weaknesses

  • The three worst performing commodities were palladium, coffee and wheat, down 17.75 percent, 16.56 percent and 13.00 percent, respectively. Palladium prices receded with the expected drop in vehicle sales, but palladium mines in South Africa also lost production due to the virus shut down, somewhat balancing the market. Coffee suffered from anticipation that Brazil would have a record crop this season due to optimal weather conditions. Wheat experience a bumper crop this past season, which had depressed prices.
  • The worst sector performance, relative to the benchmark, came from our weighting in packaged software, equal weighting in oil and gas production and underweighting in real estate investment trusts (REITs). Shares of Goldmoney, a financial technology company that operates a gold-based savings and payment network, rallied very hard off the bottom during the second quarter and afterward drifted down 3.28 percent by quarter-end. Even with only an 0.88 percent weighting in Goldmoney, a negative return for a stock when the fund was up nearly 40 percent translated to a 30 basis point loss of outperformance.
  • Cash, Barrick Gold and BHP Group were the three worst detractors to our performance, losing 144 basis points, 83 basis points and 61 basis points, respectively. Cash balances averaged 4.34 percent, and this was a drag when the fund appreciated nearly 40 percent. We were zero-weighted in Barrick Gold, a benchmark holding, which gained 48.05 percent for the quarter. The fund was overweight gold stocks and had five other non-benchmark gold companies that delivered 90 basis points or exceeded that contribution to the fund. The fund was underweight BHP group, with its 5.15 percent weighting in the benchmark versus the fund at 1.05 percent, and the company rose 39.04 percent for the quarter. This amounted to 61 basis points of lost performance.

Outlook

According to a report by Haynes & Boone, more than 200 North American oil and gas producers, owning over $130 billion in debt, have filed for bankruptcy since 2015. Royal Dutch Shell said it will write down between $15 billion and $22 billion in the second quarter—a sign of how severely the coronavirus has hit the oil majors. BP’s CEO said in an internal note that the company plans to let go of 14 percent of its workforce, or 10,000 jobs. Citigroup said that demand growth for oil products will never return to the levels it reached before the coronavirus outbreak. The bank added that it expects oil prices to remain closer to $45 a barrel than $60 a barrel in the long-term. The World Bank cut its forecast for average oil prices in 2020 to just $35 a barrel, down from the forecast of $58 a barrel in October.

The World Meteorological Organization (WMO) says that global temperatures are already consistently breaking records, with 2016 the warmest ever followed by 2019. According to the latest Environmental Protection Agency (EPA) inventory, greenhouse gas emissions in the U.S. rose 2.9 percent in 2019. According to Goldman Sachs, spending on renewable power is set to overtake oil and gas drilling for the first time in 2021 and clean energy affords a $16 trillion investment opportunity through 2030. China, the world’s largest solar market, plans to subsidize 434 photovoltaic power projects with a combined capacity of 26 gigawatts this year, reports Bloomberg. This is a 13 percent increase in subsidy-eligible solar projects from last year. Powering all the growth in electric and fuel cell vehicles will require new investment in battery metals. Cobalt demand is expected to surge as Tesla expands in the coming years to China and Europe and as other carmakers roll out electric vehicles. Fuel cells are getting a second look as they can use hydrogen as a fuel and emit water as a waste product. Platinum will get a second life in the fuel cell production chain as manufacturers use platinum as a catalyst. Copper demand is expected to grow with the broader adoption of electric vehicles. The case for an infrastructure stimulus bill is still on the table, but the objectives of the two political parties are at odds, with one side favoring preserving the oil and gas industry while the other is looking towards new investment to mitigate climate change.

 

The S&P Global Natural Resources Index includes 90 of the largest publicly-traded companies in natural resources and commodities businesses that meet specific investability requirements, offering investors diversified, liquid and investable equity exposure across 3 primary commodity-related sectors: Agribusiness, Energy, and Metals & Mining. It is not possible to invest in an index.

A basis point, or bp, is a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 1/100th of 1%, or 0.01% (0.0001).

Fund portfolios are actively managed, and holdings may change daily and should not be considered a recommendation to buy or sell any security. Holdings are reported as of the most recent quarter-end. Holdings in the Global Resources Fund as a percentage of net assets as of 6/30/2020: Direxion Daily S&P Oil & Gas Explorers and Producers Bull 2X Shares ETF (GUSH) 0.00%, GoldMoney Inc. 1.19%, Barrick Gold Corp. 0.00%, BHP Group Ltd. 1.09%, Royal Dutch Shell PLC 0.00%, BP PLC 0.00%, Tesla Inc. 0.00%.

Net Asset Value
as of 09/18/2020

Global Resources Fund PSPFX $4.99 -0.01 Gold and Precious Metals Fund USERX $14.39 -0.17 World Precious Minerals Fund UNWPX $5.58 0.02 China Region Fund USCOX $9.46 0.08 Emerging Europe Fund EUROX $5.66 -0.06 All American Equity Fund GBTFX $23.51 -0.26 Global Luxury Goods Fund USLUX $17.03 -0.19 Near-Term Tax Free Fund NEARX $2.25 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change