Energy and commodity stocks around the world have lagged behind in the bull market because of oversupply or weak demand.
Some investors, including Rob Young of Icon Funds, know just where to look.
The Icon Natural Resources Fund ICBMX, -1.49% established in 1997, was named a 2018 Lipper Fund Award Winner for the three-year period ended Nov. 30, 2017. The mutual fund invests globally in natural resources and commodity producers and suppliers.
In an interview, Young explained the fund’s strategy of selecting companies that appear undervalued based on a proprietary “earnings discount growth model,” as well as other factors, including revisions of earnings estimates and improvements in credit quality.
Icon Advisors is based in Greenwood, Colo., and has about $2 billion in assets under management. The Icon Natural Resources Fund has $89 million in assets.
“We tend to shy away from macro viewpoints,” Young said, meaning that rather than predict the fluctuation of commodity and materials prices, the fund’s managers make their selections and then wait for value to be realized. “Value investing requires a lot of patience.”
Young emphasized timing of stock purchases. “We find companies that not only have value, but it is their time to have market leadership,” he said.
Paper and packaging
Young said he was excited by the market for paper and packaging in China and named Lee & Man Paper Manufacturing Ltd. 2314, +1.82% the country’s second-largest player in the space, as a favorite. He called the company a play on the rapid growth of e-commerce and described it as "a second derivative” to the growth of Alibaba Group Holding Ltd. BABA, -2.87%
“China has historically imported a lot of wastepaper,” Young said. But as a result of changes to the country’s environmental policies, wastepaper imports have been greatly reduced, while regulators have also sought to “shutter smaller paper mills that are less environmentally friendly.”
That is enabling Lee & Man to raise prices, which Young expects to lift the company’s shares.
Young described a “consolidation feeding frenzy” in the international paper and packaging industry, which can make investors a lot of money if they hold shares of targeted companies. Smurfit Kappa Group PLC SK3, +0.00% was the Icon Natural Resources Fund’s largest holding as of Jan. 31 and recently rebuffed a takeout offer from International Paper Co. IP, -2.47%
Indonesian energy
Another industry where Young sees significant opportunities is Indonesian coal. He said about 40 million people there (12% of the country’s population) lack electricity service, and more than half of the new power plants planned by the government will be fueled by coal. Adaro Energy ADRO, +1.47% and Indo Tambangraya Megah ITMG, -2.36% are in the fund’s top 10 holdings.
Portfolio
As of Jan. 31, 53% of the fund was invested in shares of basic materials companies, with 8% in consumer cyclical companies and 39% in energy exploration, production and service companies, according to Morningstar. The geographic breakdown was 44% North America, 5% South America, 26% Europe and 25% Greater Asia. About 67% of the fund was invested in developed markets, with the rest in emerging markets.
Here are the top 10 holdings of the fund as of Jan. 31:
| Company | Ticker | Country | Industry | Share of fund | Total return - 2018 through March 16 | Total return - 3 years |
| Smurfit Kappa Group PLC | SK3, +0.00% | Ireland | Containers/ Packaging | 4.4% | 27% | 44% |
| Mondi PLC | MNDI, +0.39% | United Kingdom | Pulp and Paper | 4.3% | 1% | 55% |
| PT Adaro Energy Tbk | ADRO, +1.47% | Indonesia | Coal | 4.1% | 10% | 144% |
| PT Indo Tambangraya Megah Tbk | ITMG, -2.36% | Indonesia | Coal | 4.1% | 34% | 114% |
| Posco ADR | PKX, -2.05% | South Korea | Steel | 3.7% | 3% | 52% |
| Turkiye Petrol Rafinerileri A.S. | TUPRS, +0.26% | Turkey | Oil Refining/ Marketing | 3.6% | -5% | 163% |
| Fibria Celulose SA | FIBR3, -0.22% | Brazil | Pulp and Paper | 3.5% | 34% | 79% |
| Sinopec Kantons Holdings Ltd. | 0934, +0.00% | China | Oil and Gas Pipelines | 3.3% | -3% | -9% |
| SRC Energy Inc. | SRCI, -3.33% | United States | Oil and Gas Production | 3.2% | 9% | -18% |
| Eastman Chemical Co. | EMN, -1.17% | United States | Chemicals | 3.2% | 17% | 68% |
| Sources: Morningstar Direct, FactSet | ||||||
Performance
Morningstar has assigned four-star ratings (out of five) for all three of the fund’s share classes. The fund’s prospectus uses the S&P 1500 index as a performance benchmark, but Young said an equal combination of the MSCI All Countries World Materials Index and the MSCI All Countries World Energy index “captures a better barometer of success.”
Here’s how all three of the fund’s share classes have performed against the index, excluding sales or redemption charges and net of expenses:
| Fund share class or index | Ticker | Total return - 2018 through March 16 | Total return - 2017 | Average annual total return - 3 years | Average annual total return - 5 years | Average annual total return - 10 years |
| Icon Natural Resources Fund - Class A | ICBAX, -1.50% | 0.8% | 16.6% | 5.4% | 8.1% | N/A |
| Icon Natural Resources Fund - Class C | ICBCX, -1.50% | 0.7% | 15.8% | 4.6% | 7.2% | N/A |
| Icon Natural Resources Fund - Class S | ICBMX, -1.49% | 0.9% | 16.9% | 5.5% | 8.3% | 4.4% |
| MSCI AC World Materials Index - U.S. Dollars | -0.9% | 30.2% | 10.1% | 4.8% | 1.1% | |
| MSCI AC Energy Index - U.S. Dollars | -4.0% | 7.6% | 3.7% | -0.3% | -0.2% | |
| S&P 1500 Index | 3.3% | 21.1% | 12.0% | 14.2% | 10.4% | |
| Source: FactSet | ||||||
The fund has fared as well, or better, than the two MSCI indexes over longer periods. But when discussing the S&P 1500, Young acknowledged that a natural resources fund will be “challenged in a variety of ways” when compared with a broad index during a period of weak commodity prices.
Sales charges and expenses
The fund’s class A shares have a 5.75% sales charge and the class A and Class C shares have deferred sales charges of 1% on certain redemptions made within one year. Sales charges can be reduced for larger investment amounts or depending on the relationship between your broker or investment adviser with Icon Funds.
Here are the fund’s expenses by share class for the year ended Sept. 30, 2017:
| Fund share class | Ticker | Total annual expenses | Expense reimbursement | Net expenses | Morningstar average expenses for category and share class - 2017 | Morningstar median expenses for category and share class - 2017 |
| Icon Natual Resources Fund - Class A | ICBAX, -1.50% | 1.92% | -0.16% | 1.76% | 1.38% | 1.38% |
| Icon Natual Resources Fund - Class C | ICBCX, -1.50% | 2.86% | -0.35% | 2.51% | 1.38% | 2.10% |
| Icon Natual Resources Fund - Class S | ICBMX, -1.49% | 1.53% | -0.02% | 1.51% | 1.38% | 1.12% |
| Sources: Icon Funds prospectus, Morningstar | ||||||
Those expense waivers are in place until at least Jan. 31, 2019. Even with the waivers, Morningstar rates the expenses for all three share classes as “high.”
The possible sales charges and redemption charges, along with the differing expenses and waivers, make for a complicated decision and underline the importance of having all the information and discussing them in detail with your broker or adviser.