The underperformance of mining and commodity stocks has been well documented in recent times. The slowdown of the global economy – particularly in emerging markets – and poor internal management have been cited as reasons for the poor performance of mining stocks, well before the recent correction in markets.
Either way, our data shows that while the FTSE All Share has returned 33.07 per cent over five years, the FTSE All Share Mining index has lost 41.69 per cent.
Performance of indices over 5yrs
Source: FE Analytics
Although Morgan admits that the immediate outlook for these companies may be unclear, he urges investors not to be too short-termist.
He says the First State Global Resources fund is a perfect long-term holding as it is positioned to take advantage of a change in investor sentiment.
"The First State team has considerable experience of investing in the mining and resources sector," Morgan (pictured) said.
"The commodities sector has been a dire place for investors over the last couple of years. Falling commodity prices, rising costs and a litany of aborted projects have weighed heavily on sentiment, in stark contrast to wider markets, which have been buoyant."
"It has been a tough environment for all funds specialising in the area, and First State Global Resources is no different."
"However, I believe their approach could reward patient investors over the long-term, though remember, this is a specialist fund whose performance depends on commodity prices, which can be volatile. It remains on our list of favourite funds across the major sectors."
Morgan accepts that investors need to have a higher appetite for risk if they are to invest in the fund, but because of the changing dynamics in the sector, he says the fund could well reward anyone who is willing to take the plunge.
"In the longer term, a more positive outlook for commodity demand could be a catalyst for investor sentiment to turn," he said.
"Some positive factors remain. The difficult economic environment has led to the postponement or closure of new mining projects."
"Combined with the natural decline of output from existing sources and the high cost of bringing on new supply, this should be supportive of longer-term prices even if growth in demand remains muted," Morgan added.
First State Global Resources was launched in October 2003 and is headed up by Joanne Warner.
According to FE Analytics, the fund has been a top-quartile performer in the IMA Global sector since then, with returns of 145.68 per cent.
Performance of fund vs sector and benchmark since Oct 2003
Source: FE Analytics
However, it has slightly underperformed against its composite benchmark – split 75/25 between the HSBC Global Mining index and MSCI AC World Energy index – which has returned 152.32 per cent over the period.
As the graph shows, the fund has had a turbulent few years. Although it has beaten its benchmark over one, three and five years, Warner’s fund has experienced double-digit losses over each of these time-frames.
Morgan says that the fund has struggled recently because its fortunes are tied to the performance of commodity prices.
"According to Joanne Warner, the fund's lead manager, the key problem is volatility in the underlying commodities such as iron ore and copper," he continued.
"This has made it difficult to estimate mining firms' earnings and, given the uncertainty, many investors have opted to steer clear."
"She points out that the energy sector – where the fund also invests – has performed far better because energy prices have been stable, making company earnings forecasts more certain."
Morgan says that gold stocks have been under particularly intense pressure this year and have been a key driver of the fund's recent negative performance.
"Warner points out that many gold equity funds have been subject to redemptions as investors fled the sector, which has depressed share prices, particularly among small- and medium-sized companies," he explained.
"The fund's largest gold position, Goldcorp, performed relatively well versus its peers, but smaller firms exploring or developing new projects were a significant drag."
On the positive side, the fund has seen strong performance from US oil producers focused on the expansion of production from oil shale deposits.
"For instance, low-cost producer Concho Resources fared well, and there were good returns from larger companies such as Chevron, as well as oil services companies," said Morgan.
"A more surprising positive contributor at the start of the year was an Australian-based explorer whose share price rose over 70 per cent following the discovery of a high-grade nickel and copper deposit."
Warner runs a high-conviction portfolio of 70 holdings. Her highest regional weighting is to the US, making up 51.8 per cent of the fund.
First State Global Resources' largest sector position is in energy stocks, accounting for 30 per cent of AUM.
The fund has an ongoing charges figure (OCF) of 1.6 per cent and requires a minimum investment of £1,000.
Morgan says the volatile nature of the fund means it suits a drip-feeding approach to investing.
This weekend, FE Trustnet will look in more detail at whether it is better to invest a lump sum into a cautious fund or drip-feed money into a more adventurous one.