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Funds to take advantage of the FTSE’s cheapest sector

20 February 2014

FE Trustnet looks at a selection of funds that give investors differing levels of exposure to the battered mining sector.

By Joshua Ausden,

Editor, FE Trustnet

With the majority of developed market indices at record or close to record highs, it’s becoming more and more difficult for investors to find genuine value in risk assets.

There is one standout sector fund managers highlight as being cheap, however – mining and natural resources stocks, which have had a torrid time since 2011.

Performance of indices over 3yrs


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Source: FE Analytics

The sector has suffered from the slowdown in emerging markets growth and poor company management, which has been compounded by expensive starting valuations.

However, with valuations now at Lehmans crash-levels, an increasing number of equity managers are increasing their exposure to the battered sector.

The significant changes in management teams at Rio Tinto, BHP Billiton and Glencore – to name but a few – are being tipped as a possible catalyst for a rebound.

Here is a selection of funds that give investors exposure to mining.


UK funds

While the more bullish investors and advisers among you are likely to look directly at a mining fund, for those who are a little more cautious, a UK fund with significant exposure to the sector is a decent option.

Across the IMA UK All Companies and IMA UK Equity Income sectors, FE data shows that 41 funds have more than 10 per cent in basic materials – a sector that includes mining exploration, mining services and materials and processing.

Among the highest profile of these is the value-focused Standard Life UK Equity Unconstrained fund, headed up by Ed Legget.

The manager, who tops the IMA UK All Companies sector over five years with returns of more than 375 per cent, holds both Rio Tinto and Vedanta Resources in his top-10.

Overall, he has 13.8 per cent in basic materials.

David Cumming’s
Standard Life UK Equity Recovery portfolio has even more, at 18.7 per cent.

Richard Buxton is another big fan of the battered sector.

He is generally very bullish at the moment and sees miners as offering a cheap way to get access to a continued improvement in the UK recovery.

His Old Mutual UK Alpha fund has 22.34 per cent in the sector, and includes Rio Tinto, Shell and Genel Energy as his highest conviction bets.

None of these managers are as bullish about mining as Dimensional’s equity team.

Its UK Value fund, which unsurprisingly has a bias towards unloved areas of the market, has almost a third of its £350m AUM in basic materials.

Shell, BP, Rio Tinto, BG and Glencore are all top-10 holdings.

All five have underperformed the wider FTSE 100 since Glencore was floated in May 2011.


Performance of stocks and index since May 2011

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Source: FE Analytics


The improved capital discipline from a number of companies in the sector has led to a number paying out significant dividends.

The likes of Rio Tinto and BHP Billiton yield 3.7 and 4.8 per cent, respectively.

High profile equity income managers such as FE Alpha Manager Adrian Frost, who runs Artemis Income, as well as Aviva Inv UK Equity Income and Liontrust Macro UK Equity Income, have recently upped their exposure to basic materials.

All have at least 7 per cent in the sector.

Nine of the 97 funds in the IMA UK Equity Income sector currently hold both Rio Tinto and BHP Billiton in their top-10, including value expert Henry Dixon's GLG UK Income fund, as well as the Aviva fund.


Global funds

When looking at IMA Global and IMA Global Equity Income, the obvious choice for anyone looking for exposure to mining is the £3.3bn M&G Global Basics fund.

Manager Randeep Somel has recently increased his exposure to the sector to 20 per cent, which he explained in more detail in an article on FE Trustnet.

The fund’s focus on basic materials has seen the fund fall behind its peers over one, three and five years, though Somel is convinced that the ultra-low valuations in mining in particular will help drive performance from hereon in.


Performance of fund vs sector over 5yrs

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Source: FE Analytics

For anyone looking for something with a more flexible mandate, there are more than 50 Global or Global Equity Income funds with at least 10 per cent in basic materials, and 21 with more than 20 per cent in the sector.

Discounting those with a specific focus on basic materials, among those with a significant overweight at the moment are M&G Global Dividend and Artemis Global Growth.

ALT_TAG FE Alpha Manager Stuart Rhodes’ £8.9bn M&G portfolio has 26.8 per cent in mining, according to our data, with large positions in Occidental Petroleum, Methanex and Gibson Energy.

The fund has been a standout performer in its IMA Global sector since its launch in May 2008, though its significant mining exposure has seen it slip behind its peers over the past 12 months.

It is still well ahead since launch.

Performance of fund vs sector and index since launch

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Source: FE Analytics

Manager Rhodes (pictured) targets both income and growth and places a particular focus on companies that are able to grow their dividends.

Cairn Energy, Vale and China Oilfield Services are all top-10 positions for Peter Saacke, who has run the Artemis Global Growth fund since 2004.

In total, he has 22.9 per cent in basic materials.

The four crown-rated fund has also slightly underperformed in recent months, but its longer term record remains strong: FE data shows it is a top-quartile performer in its IMA Global sector over three and 10 years, and second quartile over five.



Mining funds

Mining funds have suffered significant redemptions for obvious reasons in the last three years or so.

While they are clearly unloved, some industry experts such as Chelsea Financial’s Darius McDermott and Hargreaves Lansdown’s Mark Dampier think they’re possible contrarian plays for investors with a long enough time horizon.

Arguably the best-known and most established mining fund out there is Neil Gregson’s JPM Natural Resources fund, which had a stellar run between 2000 and 2010, but has since suffered significant losses, underperforming the FTSE World Mining index over the past three years.

It is down some 46 per cent over a three-year period, though remains in the black over five and 10 years.

Performance of fund and index over 5yrs

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Source: FE Analytics

Other well-known players in the sector include Evy Hambro’s $7.7bn BlackRock Global Funds World Mining fund, which has fallen by a similar level, as well as Investec Enhanced Natural Resources.

The latter fund’s ability to short has helped it to protect better against the downside over the last three years, though it is still down 23.21 per cent over the period.

Rio Tinto and BHP Billiton have a combined weighting of more than 20 per cent in Hambro’s fund, and are both top-10 holdings with Gregson.

The Investec fund currently has a 22 per cent short position, reflecting the fund’s relative cautiousness in the current environment.

For anyone looking for something even more niche, there are seven gold mining funds that have suffered more than their more mainstream counterparts over the past three years or so.

BlackRock Gold & General
, also managed by Hambro, is the largest and highest profile, and is invested in the larger end of the market.

Arguably the second highest profile fund is Smith & Williamson Global Gold & Resources, which focuses on small and mid caps.

Chelsea’s McDermott says a fund with such a focus could rebound harder and faster if sentiment towards the asset class improves.


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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.