Institutional investors think equity markets have peaked, hedge fund returns haven’t met expectations and other alternatives such as real estate are overvalued—but they continue to want natural resources in their investment portfolios.

They especially favor upstream energy ideas, as opposed to water and agricultural investments found in the broader natural resource category.

That’s according to a July survey of 117 institutions by research firm Preqin.
 
Some 47% of respondents said they would commit the same amount of capital to natural resources in the next 12 months as compared to the prior 12 months. Another 28% said they’d place less capital than before and 25% said they plan to make larger commitments than before.

Commodity price volatility was cited by 58% of the investors as the biggest challenge to return generation among natural resources investment. Global geopolitical concerns also weighed heavily, cited by 42% of the respondents.

 

Despite these challenges, 65% of these investors said they favor natural resources, while 42% said they prefer water-related ideas and 31% said they would select agriculture or farm land investments.

Some 37% of those surveyed said they think natural resources failed to meet expectations over the past 12 months, but 53% said these type of investments did meet expectations. Only 10% said that natural resource-related investments have exceeded their expectations.

“More generally, investors in private equity and private debt are the most satisfied with the performance of their portfolios in the past 12 months to July, with 93% and 88% respectively saying performance met or exceeded expectations. By contrast, 46% of hedge fund investors and 37% of natural resources investors were dissatisfied,” Preqin said.

For infrastructure and natural resources, a majority of investors believe assets are fairly valued and, notably, 27% of natural resources investors say assets are undervalued, with room for further price rises, Preqin said.

Many investors are dissatisfied with the performance of the natural resources asset class in recent months and, for the second consecutive year, the proportion looking to invest more capital in the asset class over the next 12 months has fallen. “Although high returns are not the primary motivation for a natural resources allocation, a notable 28% of investors plan to invest less capital in the year ahead,” it said.