George, who manages a number of commodities-focused funds at Investec including the £201m Enhanced Natural Resources portfolio, says that one of his major investment themes is direct exposure to palladium, as demand far outweighs the supply.He prefers to get exposure to this through exchange traded commodities [ETCs] instead of miners that extract the precious metal.
"Palladium is the metal used in the exhaust systems – catalytic converters – of gasoline cars," he explained. "There has always been demand from the US car market, however there has been a real increase in demand from China."
"The sale of cars in China has increased from 1.2 million in January 2012 to 1.7 million in January 2013."
"However, the supply of palladium looks terrible – 50 per cent of the world’s supply comes from South Africa, but with mass labour strikes and the incident where 47 workers were killed, there has been a real upward pressure on prices."
"I don’t think [mining] companies are going to benefit because of supply disruption. The volume of strikes has meant their earnings have declined – but the price has gone up."
"Therefore we are looking to access palladium via exchange traded commodities."
George holds two physical palladium ETCs in his Investec Enhanced Natural Resources fund – ETFS Physical Palladium and Source Physical Palladium. The latter is currently its second-largest holding, at 4.3 per cent of assets under management.
The ETFS vehicle has the longest track record of the two. According to FE data, it is up 154.5 per cent since its launch in June 2007.
Performance of ETF and index since June 2007
Source: FE Analytics
Palladium’s performance is tied to that of China, as the graph above suggests. The metal had a poor 2011 and first half of 2012, but has since rebounded at an even faster rate than the MSCI China index.
Palladium has had a good start to the year, returning more than 11 per cent.
George believes that iron ore is another metal that will benefit from the next phase of growth in China.
"Iron ore is another theme within the portfolio," he explained. "It is a much more volatile commodity – the price had dropped from $150 a ton to $85 last year. This has been because Chinese manufacturing has seen a real slowdown in recent times, but that was short-lived."
"The new leadership is looking to accelerate its infrastructure projects and the iron ore price has increased to $152. It’s like China took a pause for breath and now the leadership is trying to stimulate growth in the economy."
"China isn’t over-industrialised either. It is only 52 per cent urbanised and the current leadership wants to increase that to above 60 per cent."
George currently runs six commodities-focused portfolios at Investec. These include Investec Global Natural Resources, Investec Enhanced Natural Resources and Investec Global Gold.
He has been running the portfolios since January 2007. He has returned 90.21 per cent over the period, compared with 29.96 per cent from his peers.
Performance of manager vs peers since Jan 2007
Source: FE Analytics
The manager has the ability to short positions in his £201.6m Investec Enhanced Natural Resources fund. Currently his biggest bet in this area is steel.
"Steel is a commodity we have a negative outlook on over the short-term," he explained. "We have shorted steel in the enhanced fund because construction and the outlook for infrastructure in the US and Europe looks very weak."
George is also concerned about the long-term outlook for gold, although he is slightly more optimistic in the near-term.
He commented: "Gold has been quite a tough and challenging place to invest over recent years. The correlation between the gold price and gold mining equities has broken down as the cost of production has put upward pressure on earnings."
"This has de-rated companies to all-time lows. However, there is the risk the gold price could fall lower if the US labour market picks up."
"It is easy to call right now as people want exposure to real assets as interest rates remain low and the Fed maintains its quantitative easing. Our outlook for gold in the short-term is quite positive, but we are not banging the table about it."
"We hold long-only positions in gold companies, but we only hold two or three out of a possible 30 or 40. We are advocating a broader natural resources approach instead of a gold-only strategy."
George’s Investec Enhanced Natural Resources fund requires a minimum investment of £1,000 and has a total expense ratio (TER) of 1.68 per cent. It also charges a performance fee, relative to Libor plus 4 per cent.