An Investment Only a Mother Could Love: The Case for Natural Resource Equities

GMO

Lucas White, Jeremy Grantham

Research

12 Pages

GMO argues natural resource equities offer overlooked diversification, inflation protection, and long term return potential despite investor skepticism. The paper claims commodity producers historically outperformed during inflationary periods, while energy and metals exposure within the S&P 500 declined more than 50%, creating a contrarian opportunity.

Key Takeaways

Inflation Protection Edge: During eight US inflationary periods above 5%, energy and metals companies outperformed the S&P 500 every time and generated 6% average real annual returns.
Long Term Diversification: A 50/50 portfolio of resource equities and the broader US market produced materially lower 10 year return volatility than either asset class independently.
Equity Premium Advantage: Since the 1920s, oil prices rose just 0.5% annually in real terms, while oil and gas companies generated more than 8% real annual returns.
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