The Anaylst: Down under's back-door into a boom

Regular readers of this column may have picked up on a trend. Many of the funds I have highlighted have, to a greater or lesser degree, focused on the urbanisation of Emerging Markets.

This is just a fancy way of saying more people are moving out of agricultural jobs and into the cities. It could be the last great industrial revolution, but of course it is affecting many more people than the previous ones. In fact, with more than three billion people involved it's hard to see how it will stop now that it's started.

One obvious way to play this theme is to buy an Emerging Markets fund; these have been soaring over the last few years. Another way is to look at areas which are likely to benefit from the growth in emerging markets, hence why this week I am examining the Oceanic Australian Natural Resources Fund.

Unsurprisingly, this fund focuses on Australian resources companies. The thought of this might send you running to the hills, after all, why invest in such a narrow fund when you can buy more diversified global funds?

However, Australia is extremely rich in natural resources and this fund is designed to benefit from the smaller and mid-size companies, which would be beyond the reach of a typical large global fund. The fund is run out of Perth by Elliott Rowten and Stuart Bell, both of whom have many years experience in Australian equities.

I like their realistic approach. They are not blind commodity bulls and are fully aware that there will be plenty of volatility over time. Indeed, when they feared a market setback in July, the portfolio was around 20 per cent invested in cash. Despite this the volatility of the fund was highlighted when it fell by a whopping 35 per cent in August alone.

It has since regained a considerable amount of those losses, and even taking that fall into account the fund has risen by more than 94 per cent since its launch in 2005. Clearly, this is not a fund for the faint-hearted investor.

The recent extreme volatility actually had nothing to do with the fundamental strength of the companies themselves. For example a company called Oilex, which the fund originally bought when the share price was 70 cents, had risen to A$1.70 but fell down to A$1 without any negative news on the company's prospects.

The managers took the opportunity to buy more shares at A$1.04 and have been rewarded as the share price bounced back to A$1.60. This is a good example of why it can pay to invest with managers who stay calm during market setbacks and don't get drawn along with the herd of irrational sellers.

Australian companies have a great deal of expertise in natural resources, so it is surprising that many of them trade at a discount to their peers in other developed countries.

The Oceanic team believe that many of the companies they hold are potentially lucrative takeover targets, not only for businesses in the developed world, but for companies in China and Russia, too.

I believe these Australian companies are an interesting way to play this Asian growth story via a relatively stable political environment.

Oceanic feel that we are still at the early days of this theme. The 20-year bear market in commodities that preceded this recent bull run resulted in a severe shortage of skilled geologists and mining engineers and a general lack of production capacity.

For example, even on conservative estimates there are not enough zinc deposits to satisfy the galvanised steel makers beyond 2010.

Demand for steel remains huge, as it does for copper wiring. This demand feeds all the way down the supply chain, from miners to shippers to construction companies.

The Oceanic Australian Natural Resources Fund is a high-conviction portfolio with the top 10 holdings accounting for over 50 per cent of the fund. This further increases the risk. The fund is now around £70m in size and I expect it to close at £100m.

This should ensure that the managers can continue to invest in the small companies that are their speciality. They will also be launching a global resources fund in early November, which will have access to Canadian companies for example.

As I said earlier, the Oceanic Australian Natural Resources Fund is highly volatile, so it should only form a small part of a diversified portfolio. I think it is worth adventurous investors considering this fund for exposure to a region often ignored by global commodity funds.

Mark Dampier is the head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more information about the funds included in this column, visit www.h-l.co.uk/independent