Mark Dampier: Supercycle or not, there is potential in resources
Friday 12 April 2013
Mining, Energy and Resources funds dominate the bottom of the fund performance tables over the year to date. It is a similar picture if you look back over the past one or two years. Before this many were performing exceptionally well. Many commentators suggested we were in a 30-year "supercycle", where industrialisation and urbanisation in developing countries was driving demand for commodities and consequently their prices. That said, as with most long-term trends there will be setbacks and corrections along the way, and perhaps this is just one of them, the previous one being in 2008.
The JPM Natural Resources Fund invests broadly across the sector in gold and precious metals companies; those mining for base metals such as copper, zinc and iron ore; and energy companies. The default position is to have about 30 per cent invested in each of those areas, with the remaining 10 per cent invested in more specialist companies such as those mining for diamonds, rare earth minerals or agricultural commodities. Unfortunately, being diversified across more than 20 commodity types and by geography has afforded the fund little protection, and it has had a torrid couple of years.
Neil Gregson, the fund's manager, believes there are similarities today with the late 1990s. At the time of the Asian financial crisis emerging markets and commodities were joined at the hip. When stock markets fell, so did commodity prices. To an extent it is the same today. Concern over China's pace of economic growth can send commodity prices falling. I suspect the commodity cycle is also being influenced by concern over developed markets, particularly the stagnating economies of Europe and the UK.
Furthermore, some suggest that another nail in the coffin of the supercycle is emerging markets moving from being export-led to consumption-driven economies. The consumer growth story hardly suggests that basic commodities won't do well, in my view. Many emerging-market consumers want the lifestyles we in the West take for granted and this will involve plenty more resource-intensive industrialisation and modernisation.
Over the short term, commodities and commodity related companies will always be at the mercy of economic events. In recent times many companies have not helped themselves as management teams have made poor decisions and failed to keep control of costs. This has been particularly true in mining, where escalating costs have swamped the advantage of any price rises.
The JPM Natural Resources Fund also has a bias towards smaller companies. This tends to be an area where Mr Gregson finds the best valuations and the best prospects for production growth. But unfortunately, smaller companies can be driven by cash flowing into or out of the sector. Mr Gregson puts it neatly when he suggests investors tend to "rent" the sector. In other words, rather than taking a long-term buy-and-hold approach they tend to trade in and out, meaning it is either feast or famine.
He has recently increased the fund's exposure to copper and aluminium producers, where he believes supply constraints are supportive of prices, with base metals now accounting for 37 per cent of the fund. About 28 per cent of the portfolio is exposed to energy, where Mr Gregson is finding a number of opportunities in shale oil, and oil explorers in Africa and Asia.
Exposure to gold mining stocks has been reduced recently, reflecting a cautious outlook on the gold price.
The fund is currently down over 40 per cent from its peak and I suspect many investors have been bailing out. Whether you believe in a commodity supercycle or not, I cannot help but be interested when I see funds down by such a margin. This is usually the time when experienced investors with a contrarian mind-set begin to look closely for that inevitable buying opportunity. This might just be the time to consider dipping a toe in the water.
That said, many mining companies are also listed in the UK, meaning investors can already have significant exposure through their existing UK funds.
Mark Dampier is head of research at Hargreaves Lansdown, the asset manager, financial advisor and stockbroker. For more details about the funds included in this column, visit www.hl.co.uk/independent
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