There is nothing wrong with that either. Particularly in the case of First State and JPM, these funds have had a good run.
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Launched in 2006 and 1965 respectively, they also have a decent pedigree – as you can see (above and below).
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Barings Global Resources has had slightly less impressive performance over the past seven years, but it has also been around since 1994.
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So why fix something if it ain’t broke? Perhaps because there is more to global resources than miners and oil and gas.
Or so Martin Currie’s Duncan Goodwin would have us believe. He manages the firm’s Global Resources Fund, launched in 2006 also, and for the past two years has had a severe underweight in mining and oil and gas firms – an asset allocation he says has proved to be correct given their relative underperformance.
Buying miners
But now that is starting to change. Goodwin says that just as the market is starting to give up on firms in these sectors he is seeing a compelling investment case to get into them.
He has started to reduce his underweight and will possibly move to an overweight soon. Slowing growth in China, over supply of commodities and poor capital allocation have all been named as headwinds to mining and oil and gas sectors of late and consensus view has turned against them.
From a bottom-up perspective, however, Goodwin is seeing some genuine changes. Of the largest companies in the sectors and those guilty of some of the worst capital allocation decisions 20 have appointed new CEOs, he said.
The old guard of executives with an attitude of pumping money into underserving projects and offering poor returns to shareholders have started to shift.
Repeatable process
Goodwin has seen a similar change in strategy in the paper and packaging sectors since launching the fund and timed his move into the paper sector to take advantage of it.
Prior to the overhaul of the sector last year, which witnessed the consolidation of companies in North America in particular, his team had been analysing it for six years and not invested in any companies there at all.
What made Goodwin change his mind? And who else has upgraded miners to attractive from neutral? Find out on the next page…
Following the consolidation the top five paper firms have increased their market share from 40% to 60%, which has given them far greater pricing power.
Other resources sub-sectors that have served Goodwin well in the past few years have been packaging, chemicals and construction materials.
At 25% of the MSCI World Index it is easy to see why some of the other global resources funds put such a focus on mining and energy stocks, but while Goodwin has a broader universe (of approximately 800 stocks) he said his fund still sticks to a high conviction approach, holding between 30 and 50 companies.
“We have the ability to choose any stock in a broad universe but because we seek a focused portfolio we only ever have to buy the best and we do not have to invest in any sector we don’t like,” he said.
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Cheap as chips
Valuation has now become attractive in mining and energy because traditional investors in the sector have become fed up and this has not escaped analysts at Charles Stanley either.
The team there say fundamentals, technical and style factors are all broadly aligned to the positive for mining stocks. While the argument is not yet overwhelming, analyst Tom Gidley-Kitchin, said the sector has been upgraded to attractive from neutral.
“For traders, if one believes that the sector is likely to move ahead then the best approach would be to buy the bombed out stocks such as Kazakhmys, Evraz and Antofagasta. However, the approach requires very good timing on both purchasing and selling.
“For our clients, who generally have a more ‘buy and hold’ approach, we have consistently recommended quality stocks in the sector. Back testing shows that these have, as a group, outperformed, other than in periods of recovery from a major collapse such as after March 2009,” he said.
The focus on quality he said is backed up by the fact they have high margins and risk-reducing diversification abilities to make money under most economic outturns, and also provide relatively secure dividends. BHP Billiton, Rio Tinto and Glencore/Xstrata are his main calls in the sector.
Are you positive or negative on miners and energy stocks? Let us know in the comments box below…
