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A natural route to profit By Fiona Hamilton
There are very few well established natural resources funds, but what they lack in quantity they have made up for in performance. Despite a nasty setback in late autumn, their three and five-year returns have been so stunning that holders might Graham Birch, who heads BlackRock's highly regarded Natural Resources team, believes that metals, minerals and other natural resources are only part way through 'a super-cycle' on a scale that has only happened six times in the last 250 years. Led by the rapid industrialisation of countries such as China and India, he likens it to the surges in demand during the European Industrial Revolution and the opening up of the United States in the 1800s. The established mining companies are benefiting because acute shortages of equipment - from large-haul trucks to grinding mills - are making it exceptionally hard to expand supply to meet demand, though they must also contend with rising costs and political influences. "We are now in the midst of a sustained growth in demand for natural resources," Birch says. "As emerging markets in Asia and Latin America increase their consumption of metal-intensive products - anything from cars to refrigerators - they will be competing with the highly industrialised developed world for the same raw materials. Investing in mining stocks, which are set to benefit from increased growth in demand, with potential merger activity as well as rising profits, is an excellent way for volatility tolerant investors to take advantage of this trend." One snag for those who want a diversified mining fund managed by Birch's team is that BlackRock does not offer an onshore unitised option under its own - or its better known Merrill Lynch - brand. Instead, investors must choose between the Merrill Lynch World Mining investment trust, the Merrill Lynch Commodities Income investment trust, or the offshore Merrill Lynch World Mining fund, which is quoted in dollars. Tried and tested Those who prefer to stay with a tried and tested UK fund should consider either the JPM Natural Resources or First State Global Resources funds. Ian Henderson, who manages the JPM fund, believes the bull market in commodities could last another 15 years. He has done well for his investors by building a widely diversified portfolio, and taking an especial interest in smaller companies, which can be more focused and therefore more dynamic. Around a third of his portfolio is currently invested in base metals and diversified mining companies, 30% in gold and precious metal producers and 27% in energy. "It is just a matter of looking for the right opportunities and diversifying the portfolio accordingly," Henderson says. "With 270 stocks in the portfolio we aim to diffuse any perceived risk without compromising returns." One of his more recent ventures has been uranium, on the grounds that nuclear power is the most environmentally friendly form of electricity generation, and because the current stock of 430 nuclear power plants is due to grow by at least 80 over the next 10 years. The First State fund is smaller and more concentrated than the JPM fund, with only 83 holdings. It has been managed since last December by Joanne Warner, who is based in Australia, and claims to be relatively conservative, with the bulk of its portfolio in large, high quality companies. Diversified industrials such as Rio Tinto and Anglo American account for 37% of the portfolio while gold and precious metals, energy, and metals each account for around 15% with 6% in uranium and 5% in coal. First State is known for its skills in Asia Pacific and Emerging Markets, and it is confident that economic growth in China and India will keep commodity markets bubbling along even if there is a slowdown in the US. Have no fear Those who are more fearful about the outlook might feel happier with Merrill Lynch Gold & General, which has three quarters of its portfolio in gold mining shares and gold bullion, with the rest in precious metals and diamonds. "Declining mining production, increasing investment demand and a strong jewellery market, particularly out of India and China, have pushed up the price of gold to its highest for 28 years," says Evy Hambro, who works alongside manager Birch. "As well as a safe harbour asset, gold is particularly attractive during periods of dollar weakness and uncertainty in the financial markets. With stabilising capital and operating costs, the gold producers should also benefit from the higher gold price. All in all, the outlook for the gold market continues to be attractive and we expect that market fundamentals will remain strong into 2008."
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