Funds that invest in Indian energy and commodity stocks have been on a roll for the last one year, thanks to pricing reforms and expectations of an economic pick-up benefiting cyclical companies. In sharp contrast, India-based global industrial commodity and energy funds have been underperforming. Birla Sun Life Global Commodities Fund and DSP BR World Energy Fund fell 7-8 per cent last year, while Mirae Asset Global Commodity Stock Fund slipped about 2 per cent. The annualised returns of these funds since inception in 2008 and 2009 are just 3 to 6 per cent.

Investors in these global funds can consider exiting their holdings. That’s because the primary factor underlying their poor performance — a bear market in many industrial commodities and energy products — looks set to continue in the near to medium term.

Poor commodity cycle

Weak demand from a slowing China — one of the largest natural resource consumers, renewed economic troubles in Europe and increasing supply have put significant pressure on global prices of commodities such as crude oil, natural gas, coal, iron ore and copper. Stocks of miners such as BHP Billiton and Vale, and hydrocarbon explorers such as CNOOC and Noble Energy that form a part of the portfolios of the global commodity funds fell 16 to 41 per cent last year.

Add to this the strengthening of the rupee, and the report card of the three funds does not present a pretty picture. Birla Sun Life Global Commodities Fund (earlier ING Global Commodities Fund) has deployed nearly 97 per cent of its corpus in two global mutual funds — Martin Currie Global Resources and First State Global Resources Fund — which fell 9-11 per cent last year. This has pulled the Birla fund to the bottom of the heap (down nearly 8 per cent).

DSP BR World Energy Fund has invested 96 per cent of its portfolio in two Blackrock Global Funds — World Energy Fund and New Energy Fund, mostly in the former.

A marginal gain in the New Energy Fund, which invests in alternative energy stocks, has helped the DSP BR fund contain its loss last year to 7 per cent. Mirae Asset Global Commodity Stock Fund invests directly in commodity and energy stocks; the 66 per cent allocation to global stocks took a toll, but this was partly mitigated by the 34 per cent exposure to Indian stocks including winners such as ONGC and BPCL. With a weak outlook for industrial commodity and energy prices, it’s best to exit these global commodity funds and seek greener pastures.

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