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JPM's fund is a natural
By Rob Griffin
Ian Henderson's New Year's Resolution was to visit more mines in far-flung corners of the world. Whether it's one that the manager of the JP Morgan Natural Resources fund manages to keep, however, is another matter entirely.
"These trips give you the chance to spend a day with management, see the progress on individual projects and get a feel for the environment in which the company operates," he explains. "I'd love to do more but they're just very time-consuming."
And time is a commodity in very short supply. The sector has enjoyed such incredible growth - fuelled by strong demand, takeover bids and strong corporate results - that the pressure is constantly on to pick only the very best stocks. The environment has certainly been good for Henderson's fund, which has risen 507% over the past five years, to the end of November 2007, according to Morningstar. It has also been awarded five stars from Morningstar, an AA-rating from Standard & Poor's and an A from Forsyth-OBSR.
"The sector had been out of favour for the best part of 20 years which is why the share price performances have been so good," he explains. "It's only been since emerging markets have grown that resource companies have become really stretched."
Increased demand
This up tick in demand has been great for the portfolio, which was launched back in 1965 to provide long-term capital growth by primarily investing in companies across the world that are engaged in the production and marketing of commodities. As well as rising stock prices - and, subsequently, increased dividends and share buy backs - the other principle benefit to investors of putting their money into natural resources is the fact that it has a very low correlation with other asset classes.
Henderson likes to think of the market as being made up of two distinct areas: stocks that are already established and are generating earnings, those that aren't yet producing anything, but which have the potential to deliver over the longer-term. "With the first type you're literally comparing financial strength, balance sheets and future earnings power," he explains. "Non-producing companies won't have a balance sheet to speak of, but might have something in the ground that we recognise as being very valuable. It's a different kind of judgement."
So how does Henderson construct the portfolio? "Internally we compare ourselves to a notional benchmark of 30% energy, 30% gold and precious metals, 30% base metals and 10% other commodities, but I'm certainly not tied to it," he says. "The idea is to steer the fund towards areas that have got the most visibility in terms of pricing. Equally, we're interested in individual projects as a huge discovery can add a lot of value to shareholders."
Varying sectors
The fund, which is benchmarked against the HSBC Gold, Mining & Energy Index, invests in a variety of sectors. At present, 31.7% of assets are invested in gold & precious metals, with 29.9% in base metal and diversified, and 27.8% in energy. There is also a diversified look to its geographical breakdown. Canada accounts for the largest share of assets with 34.7%, followed by 20.2% in the United Kingdom and 19.2% in Australia.
The other countries represented, which each account for less than 10% of the portfolio, include the United States, South Africa, Brazil, Kazakhstan, Indonesia, Russia, Norway, Peru, Ireland and Malaysia.
As far as stock selection is concerned, Henderson has around 300 companies - a high number which reflects his enthusiasm for small and mid-cap names. "We find individual situations that may have more stock specific risk but also more long-term upside potential," he says. "We never quite know which ones will work well."
One example of a large holding that he likes is Fortescue Metals, a mining company specialising in the extraction of iron ore.
"It is building a new iron ore mine in Western Australia and we believe the iron ore price will to rise by as much as 50% next year," explains Henderson. "The companies in this space look attractive and will see good earnings in 2008."
Turnover is relatively low - during the past year it has only been around 30% - with companies being sold for a variety of reasons, including a stock reaching its full potential in terms of price, a failure to achieve certain milestones, or changes to the political environment. Basic management incompetence and simply finding better ideas are other possible reasons for the axe to fall.
Henderson is confident about the future prospects for commodities as he believes demand is likely to remain high - even though he is not expecting share prices to rise quite so sharply in the future after recent sky-high increases. "The sector has displayed phenomenal growth," he says. "The pricing environment is quite robust, companies are developing interesting projects and there are still plenty of opportunities around so it's a fun area in which to be invested."
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