Lloyd-Jones, pensions and investment specialist at the group, says that the outlook for commodity-related companies still looks challenging, but says natural resources funds should be included in a diversified portfolio.
To gain access to that part of the market he has started buying units in the £150m Investec Enhanced Natural Resources fund, which is headed up by George Cheveley and FE Alpha Manager Bradley George, having sold Neil Gregson’s JPM Natural Resources fund.
“We added Investec Enhanced Natural Resources at the start of the year and it replaced our holding in JPM Natural Resources; which has performed poorly,” Lloyd-Jones said.
“We had held the JPM fund for around five years, but its relative performance has begun to drop. It’s an asset class where you have very little choice as you haven’t got an awful amount of funds available. However, we think this is the best option available. ”
“Commodities can be a much higher risk investment than most, but they should form part of an asset allocation model and some of our clients genuinely need the diversification.”
Cheveley and George (pictured) launched their Enhanced Natural Resources fund in May 2008, having launched their Luxembourg-domiciled Investec Global Natural Resources SICAV a few months earlier. According to FE Analytics, Investec Enhanced Natural Resources has returned 5.46 per cent since launch. The fund has a composite benchmark and sits in the IMA Specialist sector, but as a point of comparison, the MSCI AC World Materials index has lost 0.14 per cent over that time.
Performance of fund vs index since May 2008
Source: FE Analytics
The £1bn JPM Natural Resources fund has been hit far harder by the unwinding of the “commodity super-cycle”, however.
Our data shows that over five years the fund has lost 3.8 per cent and more than 40 per cent over three years, while the Investec fund has delivered a positive return over five years and has lost 20 per cent over three.
However, Neil Gregson and his team only took over the portfolio in January 2012.
Nevertheless, over that time the JPM fund has still lost 27.54 per cent while an equally weighted portfolio of all the IMA Natural Resources funds has lost 11.95 per cent. The Investec fund has lost 8.44 per cent over the period.
Performance of funds vs composite portfolio
Source: FE Analytics
JPM Natural Resources has roared back in 2014 with Gregson taking full advantage of the pick-up in sentiment towards commodity companies. FE data shows the fund has outperformed both the average natural resources portfolio and the Investec fund year to date.
Despite that, Lloyd-Jones has been impressed with Cheveley and George’s longer-term track record, especially in terms of their ability to defend capital. He says that one of the major reasons why he has been drawn to the fund is due to the fact that the managers can go both “long” and “short”.
“That’s pretty much why it has outperformed others like JPM Natural Resources. While we want to use commodity funds for our higher-risk clients, we still want something that can deliver solid returns and can help to protect on the downside,” Lloyd-Jones said.
The managers use derivative transactions to take their “short” positions within their portfolio and will bet against share prices and the prices of the underlying commodity.
Currently, however, they are only running a short book within their equity exposure.
FTSE-listed miner Anglo-American, the German-based agricultural chemical and salt company K+S and Cheniere Energy, the US-domiciled natural gas company, are three of the manager’s largest shorts.
However, as George told FE Trustnet earlier this month, he and Cheveley have a much more weighty “long” book than they did 12 months ago as the managers have become far more optimistic on the natural resources market.
“I am positive over the medium term. We have seen valuations increase from being extremely cheap, but the more generalist investor is still very underweight the sector,” George said.
“I think the generalist investor will start to move out of the more expensive sectors, such as consumer staples, telcos, pharmas and financials and into commodities when more companies are able to demonstrate that they have the right mix of assets, are increasing volume growth and are effectively cutting costs.”
The manager is currently bullish on the energy sector as he expects the price of crude oil to continue to strengthen over the coming year. He and Cheveley hold 20 per cent of their portfolio in the integrated oil and gas industry, having recently upped their exposure to Total and Suncore Energy.
However, they are still cautious on the mining sector as they are concerned that China’s slowing economic growth, along with the desire of the country’s authorities to change their economic model to a consumer led one, will put pressure on the price of iron-ore.
Investec Enhanced Natural Resource’s clean share class has an ongoing charges figure (OCF) of 0.91 per cent.
