In a recent conversation with investor, market historian, and environmentalist Jeremy Grantham, we discussed the topic of investing in natural resources. Grantham is no fan of fossil fuels because of their link to climate change, but he sees natural-resources exposure, which can be captured through commodities futures and equities, as an important portfolio component. He mentioned their growth potential as a result of the energy transition and their diversification benefits.
Grantham’s remarks inspired me to take a fresh look at the equities-based Morningstar Global Upstream Natural Resources Index. Launched in 2011, it tracks the performance of companies that have “significant business operations in the ownership, management, and/or production of natural resources in energy, agriculture, precious or industrial metals, timber, and water resources.” Think miners, drillers, and harvesters who make money when commodities prices are going up.
What can the index’s history tell us about natural-resources investing? Whether through stocks or futures, commodities are not for the faint of heart. Prices are volatile and unpredictable. But there are good reasons for investors to consider a natural-resources allocation within a diversified portfolio.