Global Resources Fund

 

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Fourth Quarter 2011

In the fourth quarter of 2011, the Global Resources Fund gained 9.18 percent, the Morgan Stanley Commodity Related Equity Index (CRX) increased 11.44 percent and the S&P 500 Index increased 11.82 percent. Fourth quarter results were significantly improved over the third quarter. Click here to see returns as of December 31, 2011.

We’re pleased to continue our outstanding long-term record: Over the past 10 years, the fund was the best performer among 32 global natural resources funds, according to Lipper, as of December 31, 2011.

Three-year results have also been favorable for shareholders. The fund’s risk-adjusted performance received a five-star rating over the 3-year period by Morningstar. Among 124, 124, 87, and 38 Natural Resources funds, the Global Resources Fund earned 3 stars, 5 stars, 1 star and 4 stars for the overall, 3-, 5- and 10-year periods ending December 31, 2011.

We believe the fund has outpaced its peers over the long- and short-term because of its diversified approach to natural resources and ability to invest globally across all market capitalizations.  Historically, the fund has captured outperformance relative to peers by holding international and small-cap natural resources stocks. However, during 2011, these stocks were shunned by investors as they sought safe havens in places such as gold bullion, cash and Treasuries. Specifically, fund performance was negatively impacted by exposure to international exploration and development stage companies.

To mitigate the downside risk inherent in these smaller and international securities, we adjusted our positions throughout the second-half of the year with a bias toward larger capitalization companies that offer better trading liquidity and have better access to capital than their smaller peers. These positions added to return in the fourth quarter, with materials stocks Weyerhaeuser Co., United States Steel Corp. and International Paper Co. experiencing double-digit returns. Energy holdings Marathon Oil Corp. and Anadarko Petroleum Corp. also grew significantly over the quarter.

The fund also continued a balanced weighting between energy and materials. Compared to the benchmark, CRX, the fund was underweight the materials sector and equally weighted in energy stocks in the fourth quarter.

Looking ahead to 2012, we continue to be bullish on energy, specifically related to master limited partnerships (MLPs) and oil services contractors and equipment providers to the oilfields. Crude oil continues to possess attractive fundamentals as we see restricted supply coupled with rising demand. One of the primary factors affecting oil today is that crude oil and refined products inventories in the developed Organisation for Economic Co-operation and Development (OECD) markets are at historically low levels. Taking into consideration current geopolitical factors, including talks of Iran blocking products through the Strait of Hormuz and disrupting supply out of the Middle East, we expect West Texas Intermediate oil to remain around the $100 level.

1

As a top crude producer, Russia remains a significant factor for non-OPEC supply growth. While Russia was increasing production in the last decade, we expect flat production growth in Russia going forward. This is bullish for oil given the fact that we continue to see non-OPEC supply declining in other areas, such as Mexico and the North Sea.  

Meanwhile, demand has increased in other areas of the world. According to the International Energy Agency, while demand from developed countries has remained steady over the past few years, non-OECD oil demand has been rising. Since 1996, non-OECD demand was about 26 millions of barrels per day; in 2011 it was expected to be about 44 million barrels per day. In the next few years, demand from developing countries will outpace that of developed countries.

Master limited partnerships (MLPs) remain an attractive opportunity because of their historically steady cash flows and ability to provide monthly income amidst a volatile market. As shown in the chart below, the investment from the MLPs into midstream energy has been growing, along with the shale industry, as there has been an increased need for infrastructure. In the U.S., capital expenditures have increased from $3.5 billion
in 2005 to nearly $16 billion in 2011.

2

Over the past several months, there have been a number of acquisitions in the oil and gas industry, accounting for more than half of the worldwide total, according to the New York Times. We expect this activity to continue, as foreign-owned companies seek to invest in the attractive North American shale plays.

Many base metals lagged in 2011, and copper was among the worst performers, losing about 21 percent. However, due to the supply/demand fundamentals, we believe copper is poised for a rebound. Specifically, the growth in power infrastructure is a key driver for copper, but there have been continued shortfalls in mine output versus forecasts, caused by a variety of factors, such as weather, labor strikes, or simply poor grade.

The agricultural and fertilizer sector also looks promising. The emerging middle class continues to consume more grains, principally through the production of more meat. While we have seen a surge in the production of grains, no more farmland has been created. Therefore, one of the key ways we’re seeing increased yields out of crop lands is through application of fertilizers, creating a tight situation for potash and nitrogen phosphate.

It was recently announced that China’s urban population is now larger than its rural population. As more and more Chinese move to the cities, increase their income, acquire goods, and travel more frequently, we believe this urbanization trend should fuel growth in natural resources for years to come. While debt burdens continue to slow growth in Europe and U.S., it is offset by tremendous growth in emerging markets.

Past performance does not guarantee future results.

The Global Resources Fund ranked 96 out of 142, 51 out of 64, and 1 out of 32 Lipper global natural resources funds for total return for the 1-, 5- and 10-year periods as of 12/31/11.

The Morgan Stanley Commodity Related Index (CRX) is an equal-dollar weighted index of 20 stocks involved in commodity related industries such as energy, non-ferrous metals, agriculture, and forest products. The index was developed with a base value of 200 as of March 15, 1996. The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies.

Holdings in the Global Resources Fund as a percentage of net assets as of 12/31/11: Anadarko Petroleum Corp. 2.05%, International Paper Co. 2.20%, Marathon Oil Corp. 0.00%, United States Steel Corp. 0.00%, and Weyerhaeuser Co. 2.19%.


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