Mark Dampier: Supercycle or not, there is potential in resources

The Analyst

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

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

Voices
On the last day of campaigning before the polling booths open, the SNP leader has written to voters in a final attempt to convince them to vote for independence
scotland decidesIs a huge gamble on oil keeping the First Minister up at night?
Arts and Entertainment
Rosalind Buckland, the inspiration for Cider with Rosie died this week
booksBut what is it like to be the person who inspires a classic work of art?
Life and Style
techApple has just launched its latest mobile operating software – so what should you do first?
News
A male driver reverses his Vauxhall Astra from a tow truck
newsThe 'extremely dangerous' attempt to avoid being impounded has been heavily criticised
PROMOTED VIDEO
Arts and Entertainment
Lionel Messi in action for Barcelona
filmSo what makes the little man tick?
Arts and Entertainment
tvReview: An undercooked end (spoiler alert)
News
i100
Arts and Entertainment
Pharrell dismissed the controversy surrounding
musicThe singer said 'the last thing I want to do is degrade'
Sport
Cesc Fabregas celebrates his first Chelsea goal
footballChelsea vs Schalke match report
Arts and Entertainment
Toby Jones (left) and Mackenzie Crook in BBC4’s new comedy The Detectorists
tvMackenzie Crook's 'Detectorists' makes the hobby look 'dysfunctional', they say
Life and Style
fashion

Olympic diver has made his modelling debut for Adidas

News
i100
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Trainee Recruitment Consultant Birmingham

    £18000 - £23000 per annum + Comission: SThree: The SThree group is a world lea...

    Trainee Recruitment Consultant - Birmingham - Real Staffing

    £18000 - £23000 per annum + Commission: SThree: Real Staffing are currently lo...

    Recruitment Consultant - Soho - IT, Pharma, Public Sector

    £20000 - £25000 per annum + OTE £35,000 first year: SThree: The SThree group i...

    Sales Executive

    £20 - 24k (Uncapped Commission - £35k Year 1 OTE): Guru Careers: We are seekin...

    Day In a Page

    Mystery of the Ground Zero wedding photo

    A shot in the dark

    Mystery of the wedding photo from Ground Zero
    His life, the universe and everything

    His life, the universe and everything

    New biography sheds light on comic genius of Douglas Adams
    Save us from small screen superheroes

    Save us from small screen superheroes

    Shows like Agents of S.H.I.E.L.D are little more than marketing tools
    Reach for the skies

    Reach for the skies

    From pools to football pitches, rooftop living is looking up
    These are the 12 best hotel spas in the UK

    12 best hotel spas in the UK

    Some hotels go all out on facilities; others stand out for the sheer quality of treatments
    These Iranian-controlled Shia militias used to specialise in killing American soldiers. Now they are fighting Isis, backed up by US airstrikes

    Widespread fear of Isis is producing strange bedfellows

    Iranian-controlled Shia militias that used to kill American soldiers are now fighting Isis, helped by US airstrikes
    Topshop goes part Athena poster, part last spring Prada

    Topshop goes part Athena poster, part last spring Prada

    Shoppers don't come to Topshop for the unique
    How to make a Lego masterpiece

    How to make a Lego masterpiece

    Toy breaks out of the nursery and heads for the gallery
    Meet the ‘Endies’ – city dwellers who are too poor to have fun

    Meet the ‘Endies’ – city dwellers who are too poor to have fun

    Urbanites are cursed with an acronym pointing to Employed but No Disposable Income or Savings
    Paisley’s decision to make peace with IRA enemies might remind the Arabs of Sadat

    Ian Paisley’s decision to make peace with his IRA enemies

    His Save Ulster from Sodomy campaign would surely have been supported by many a Sunni imam
    'She was a singer, a superstar, an addict, but to me, her mother, she is simply Amy'

    'She was a singer, a superstar, an addict, but to me, her mother, she is simply Amy'

    Exclusive extract from Janis Winehouse's poignant new memoir
    Is this the role to win Cumberbatch an Oscar?

    Is this the role to win Cumberbatch an Oscar?

    The Imitation Game, film review
    England and Roy Hodgson take a joint step towards redemption in Basel

    England and Hodgson take a joint step towards redemption

    Welbeck double puts England on the road to Euro 2016
    Relatives fight over Vivian Maier’s rare photos

    Relatives fight over Vivian Maier’s rare photos

    Pictures removed from public view as courts decide ownership
    ‘Fashion has to be fun. It’s a big business, not a cure for cancer’

    ‘Fashion has to be fun. It’s a big business, not a cure for cancer’

    Donatella Versace at New York Fashion Week