Olivier Aeschlimann, Fund Manager, "IAM - Gold & Metals A" (08.08.2011): "We still have a moderately optimistic view on the global economy. That said, exogenous chocs (tsunami and supply chain destruction, NATO intervention in Libya) as well as political squirming about the debt issues in both the USA and Europe certainly have altered the level of confidence in the global financial system. Moreover, the unavoidable deleveraging process implies a lower growth path for the coming years in most OECD countries. However, despite widespread worries about the economic cycle, prices of most industrial metals and minerals (copper, coal, iron ore) have remained near record highs. This reflects, to our view, the fact that the demand remains structurally strong and primarly depends on the urbanisation process in emerging economies, which still has a long way to go." Dr Joanne Warner, Head of Global Resources, "First State Global Resources A GBP Acc" (04.08.2011): "We expect volatility in the short term to continue amid geopolitical and economic uncertainty. The market continues to forecast a decline in commodity prices, which is weighing on the 2012 forecast earnings growth for resources companies. However, earnings upgrades for resources companies are likely if commodity prices stay at current levels and consensus prices are revised higher. Valuations are attractive in our view, especially among major diversified miners.
Currently the outlook for gold remains excellent because at times when the market is nervous about macro economic conditions there tends to be a flight to the safety of gold. Gold equities have underperformed the commodity for much of this year, which was partially due to concerns over increasing costs. However, in our view, if the gold price retains its strength the attractive valuations in the equities will eventually gain more recognition.
High commodity prices have resulted in very strong cash flow generation for mining companies and the market anticipates that some of them will look to deploy this cash through an increase in mergers and acquisition activity. Already this year we have seen Rio Tinto bid for Riversdale, Equinox bid for Lundin, Minmetals bid for Equinox, which was trumped by a bid from Barrick Gold and BHP Billiton is to buy Chesapeake’s Fayetteville Shale gas assets. We expect continued corporate activity to support valuations in the short-term."
Evy Hambro, Fund Manager, "BGF World Mining Fund A2 USD" (10.08.2011): "2011 has so far been a volatile period for commodities equities. The sector has at times been at the mercy of macroeconomic uncertainty and has broadly been at the forefront of any risk on/risk off trade. Despite these headwinds, the underlying fundamentals for our favoured commodities in the mining sector continue to look supportive.
The outlook for energy sector also looks increasingly optimistic. Demand appears relatively robust, however the more crucial element of the energy market is supply. OPEC spare capacity currently sits at historically low levels and with supply disruptions from the MENA region, in particular Libya, this has exacerbated an already tightening market. As a result we have seen a strong price rise in the oil price.
The strength of those fundamentals are not yet being fully reflected in equity valuations which look attractive not only on a historical basis but also when considered in light of the exceptional levels of free cashflow companies are able to generate at current commodity prices."
Dominik Issler, Regionenleiter Mitteleuropa, "Martin Currie GF Global Ressources USD" (11.08.2011): "So far this year, energy and materials equities have generally underperformed their underlying commodities in both directions. So a series of questions present themselves. Has the world fundamentally changed for the worse? Are the equity markets right – i.e. is this year to be a rerun of 2008, when the fall in equities presaged a collapse in the price of commodities in the face of an economic crisis? Or is it going to be more like 2010, when equities sold off on top-down macro concerns but recovered later when investors realised that the global economy wasn’t about to grind to a halt?
Rather than try to answer these questions with a binary macro call, we see opportunities to generate performance through stock and, to some extent, sub-sector selection. As we saw in 2008/9, the market can quickly move to discount unrealistically low commodity prices in the valuations of high quality producers. At the same time, we are wary of sectors such as chemicals which have performed well and where fundamentals are deteriorating as a de-stocking cycle unfolds."
e-fundresearch: "Which are the most important elements in your investment process?"
Olivier Aeschlimann, Fund Manager, "IAM - Gold & Metals A" (08.08.2011): "To us, top down is equally important as bottom up. We start by defining the strength of demand and supply response for each commodity in our investment universe, and then pick the best positioned companies in each segment. Production growth, cost control and management quality are key elements to ensure success in the long term."
Dr Joanne Warner, Head of Global Resources, "First State Global Resources A GBP Acc" (04.08.2011): "We select stocks by employing a ‘bottom-up’ investment approach. We are invested across a broad range of quality commodity companies, including those working in the field of precious metals, base metals, bulk commodities and energy products.
Our investment process requires a high level of technical knowledge in a number of disciplines related to global resources, including geology, metallurgy, physics and chemistry. For example, when we analyse a mining company we examine the geology of each site, as well as the likelihood of discovering new mineral deposits there in the future.
Commodity prices are notoriously volatile and trying to time that market is a risky and thankless task. Instead, we employ a conservative approach better suited for long-term investors by focusing on some of the world class, low cost global resources companies that, in our view, are well placed to benefit from positive long-term trends in the sector."
Evy Hambro, Fund Manager, "BGF World Mining Fund A2 USD" (10.08.2011): "The investment process of the team enables us to significantly add value through identifying opportunities and catalysts in mining equities that the market has not acknowledged yet. We are able to do this through the capabilities of the team in the following areas:
Investment experience - the 16 person strong team have over 120 years cumulative experience and the core of the team have been working together for over 15 years providing them with the skills required to manage the portfolio through all market cycles
Technical knowledge - of the 11 investment professionals on the team, six have a technical background with either academic or industry experience in the Natural Resources sector. This gives them an advantage when visiting companies and assets as they are able to fully understand the risks and opportunities presented
Fundamental Analysis - the team carry out analysis on where we believe the best opportunities to be in the mining sector, through our fundamental top down macro view on supply and demand, combined with bottom up stock selection driven primarily by valuations."
Dominik Issler, Regionenleiter Mitteleuropa, "Martin Currie GF Global Ressources USD" (11.08.2011): "The Global Resources team has regular meetings with the regional and sector teams to discuss stock ideas and macroeconomic themes. A key competitive advantage of our structure is our ability to make connections across industry value chains and different geographical regions. Sharing of this information across the investment team provides a source of meaningful and sustainable alpha.
With its complex network of inter-relationships, the resources universe is particularly well suited to this approach. There are three clear stages to our investment process: identifying, evaluating and exploiting change.
Stock selection has been and will continue to be the prime driver of fund returns. We employ a consistent, disciplined thought process that encourages us to run winners and cut losers.
Our starting point is to identify change that is material to share prices and will last for some time. We believe that market participants tend to underestimate how different things can be as well as the duration of change.
Change may take place on many levels. We particularly look for change that is specific to a single or small group of companies such as:-
• Improving pricing power;
• Exploration success;
• Returning cash to shareholders.
Once identified, we then evaluate the investment opportunity using a framework of quality, value, growth and change versus market expectations.
We make use of a range of idea sources:
• Companies: regular, proactive contact;
• Colleagues: including Asia and global emerging markets, Japan and China teams; and
• We make use of selective sell-side analysts and independent experts whom we regard as the best in their fields.
Our evaluation of stock opportunities is based on the four ‘pillars’ of quality, value, growth and change:
• Quality: objective, balance sheet and cashflow outlook against expectations
• Value: relative, absolute and cash metrics. Is change already reflected in price?
• Growth: sustainability of change against expectations
• Change: understand changes to earnings forecasts, share price momentum and insider dealing
Good ideas have no value if they do not make it into clients´ portfolios. So effective communication is vital to ensuring investment recommendations add value for our clients.
Exploiting change – communication of ideas
• Our single location in Edinburgh and culture of communication encourage numerous daily discussions across the investment floor. These complement regular forums at which recommendations are reinforced and early-stage ideas identified so that colleagues have the opportunity to contribute. Once an idea has been evaluated, it is then discussed with all relevant portfolio managers using our framework of quality, value, growth and change.
• We have ownership and accountability at every stage of the investment process. Communication does not end with a recommendation. The sector manager ´owns´ and monitors the progression of each investment case, liaising closely with portfolio managers right through to eventual sale.
Ideas are generated by the team, predominantly through company meetings and information sharing with colleagues.
Meeting company management, on-site, via conference calls and at our Edinburgh headquarters is a crucial part of the idea generation process. We speak with senior management, including CEOs, finance directors and, where possible, divisional heads. The level of company knowledge we have by running research teams based on sector specialism is very high.
Over the course of a year, the seven resources sector managers have approximately 700 company meetings. We are proactive in our approach and will often contact them when we have questions. We use company meetings to cross-reference with peers, suppliers and customers
The investment community tends to operate in silos, which we believe creates inefficiencies and opportunities, because information is not applied efficiently across sectors and regions. We purposely operate with broad sector remits and collaborate across the investment team so as to exploit these anomalies.
The investment team hold frequent ad-hoc meetings to discuss stock ideas. Scheduled weekly meetings provide a forum to preview the week ahead, flag important events and meetings and, most importantly, to challenge and debate key investment themes.
The team is located in one building, on one floor. This fosters short lines of communication and means we have a distinct decision-making and implementation advantage over our competitors. Broad share ownership in the business and our collegiate culture helps to underpin effective team working.
We work with sell-side analysts and independent experts whom we regard as the best in their respective fields. They provide us with knowledge and modeling work that can accelerate our evaluation work. We do not rely on external sources for recommendations.
Portfolio construction process
Once an opportunity has been identified and evaluated, the size of a new position in the portfolio is based on a balanced judgement between the degree of conviction and the stock´s contribution to the risk profile of the fund.
We do not believe that sector and geographical weightings are the most effective way to manage diversification and risk. We aim to have a high conviction portfolio of 30-50 stocks, diversified by individual share price drivers.
Our approach to risk management emphasises the following factors:
• We monitor carefully the contribution each position has to potential overall fund volatility;
• Stock correlations. We aim to build a portfolio with a wide range of share price drivers and avoid concentrations of correlated positions, particularly when such stocks exhibit high volatility. We use heat maps to monitor correlations across the entire portfolio;
• Macro factor sensitivity. We monitor the portfolio´s sensitivity to a wide range of factors including commodity prices, currencies, equity indices and interest rates. Since we do not expect to add much value by taking views on these variables, we typically aim to minimise such sensitivities. Where we do accept sensitivity to a commodity price, we must be able to evidence and support this position e.g. where assumptions used by equity analysts differ from commodity forward curves;
• Stress testing. Using both statistical methods and historical periods, we measure the portfolio´s reaction to a range of extreme scenarios; and
• Liquidity. We define as "illiquid" a position (total across all Martin Currie portfolios) that would take more than 10 trading days to close at no more than one third of average daily volume. Illiquidity is limited to 25% of the portfolio although to date it has run in low single digits.
In our view, the above factors give a more meaningful picture of the fund´s risk profile than do traditional measures based exposure at the sector, country or fund level.
Individual security weightings are set by taking into account manager conviction, stock volatility, correlations with current positions, as well as the general impact of the stock´s contribution to the risk profile of the fund."
e-fundresearch: "Which over – and underweight positions are currently implemented in your natural resources and/or energy funds?"
Olivier Aeschlimann, Fund Manager, "IAM - Gold & Metals A" (08.08.2011): "We do not comment on specific positions, however, in terms of broader sectorial positioning, we still like copper and iron ore as we think the pricing environment will remain favourable. We also favor precious metals, and more specifically gold and silver. In addition, fertilizers provide us with some diversification from the metal sector."
Dr Joanne Warner, Head of Global Resources, "First State Global Resources A GBP Acc" (04.08.2011): "Over the last 12 months we have increased our exposure to small market capitalisation companies. We continue to maintain an overweight position to copper and metallurgical coal in the portfolio. Both commodities are in structural deficit and demand continues to grow.
Some of our current top stock picks include:
• Rio Tinto, a diversified, British-Australian, multinational mining and resources group;
• Xstrata, a large diversified miner focussed on base metals and coal with the fastest rate of growth among its peers;
• Concho Resources, an independent oil and natural gas company operating in New Mexico and West Texas, which has strong reserve and production growth, ‘energy-friendly’ location, strong balance sheet and low geological risk;"
Evy Hambro, Fund Manager, "BGF World Mining Fund A2 USD" (10.08.2011): "Within the portfolio we favour those commodities that China; as the largest consumer of most commodities excluding oil; is unable to meet demand for internally. This has caused tightness in the copper market and bulk commodities such as iron ore, coking coal and thermal coal, where strong demand coupled with an inability from mining companies to meaningfully increase their supply of these commodities has caused strong and sustained price rises. We express our views through mining companies that are currently in production, are receiving cashflows and are using these to fund future exploration and production.
In the portfolio we are overweight copper names, which is expressed through a globally diversified bucket of high quality copper equities. Our preference for bulk commodities is expressed through our allocations to diversified mining companies, who are key producers of both iron ore, coking coal and thermal coal. We also have allocations to iron ore production; which is diversified through producers operating mostly in Africa and Australasia."
Dominik Issler, Regionenleiter Mitteleuropa, "Martin Currie GF Global Ressources USD" (11.08.2011):
e-fundresearch: "Please comment on the performance and risk parameters of your fund in the current year as well as over the past 3 and 5 years."
Olivier Aeschlimann, Fund Manager, "IAM - Gold & Metals A" (08.08.2011): "The goal of the fund is to give exposure to the global mining sector and to outperform the Bloomberg World Mining Index over the long term, which we define as a period of 3 to 5 years. The mining sector is inherently risky. We can mitigate these risks by the relative weighting in different sub segments of the sector, such as precious metals, industrials, bulks, as well as fertilizers. Since the inception of the fund in 2002, we have achieved our objectives and received various Lipper awards."
Dr Joanne Warner, Head of Global Resources, "First State Global Resources A GBP Acc" (04.08.2011): "Over the last few years we have looked carefully at the small cap companies we held that had no cashflow and unfunded development projects. We retained the best of these in our portfolio, as we were prepared to help fund them into production, but sold the second tier companies. The V-shaped recovery we experienced meant that we had locked in losses and did not fully participate in the rally, particularly in the most leveraged small cap names.
Since then our portfolio has been re-balanced from this highly defensive position to a more typical structure based upon the improved outlook for the sector and has performed well."
Evy Hambro, Fund Manager, "BGF World Mining Fund A2 USD" (10.08.2011): "The chart below shows the performance of the BGF World Mining Index versus it´s benchmark the HSBC Global Mining Index.
1 year 3 year 5 Year
BGF World Mining Fund 40.4 -20.1 67.9
HSBC Global Mining Index 36.4 -8.9 73.5
As this Fund is a single sector equity portfolio investing more than 70% of the portfolio in the equities of mining companies this portfolio will exhibit a high correlation to the mining market.
The impact of the global financial crisis in 2008 and 2009 caused demand for mining commodities to fall away as companies destocked inventories and reduced costs. During this time the market saw falls of greater than -30% across mining equities as investors scrambled to take risk out of their portfolios. During this period the BGF World Mining Fund underperformed due to it´s inability to match the weightings of the large cap diversified mining companies such as BHP Billiton and the Fund´s focus on mid-tier producers. Additionally, the portfolio suffered due to an underweight to gold mining companies, who performed well during 2009. As the BlackRock Natural resources team also manage a gold portfolio: BGF World Gold Fund, the mining fund typically has an underweight to gold equities."
Dominik Issler, Regionenleiter Mitteleuropa, "Martin Currie GF Global Ressources USD" (11.08.2011): "Since the fund was launched on 30 December 2005, it has enjoyed above average performance with lower than average volatility, returning 92.8% against a sector average of 54%. The graph below highlights the impressive risk/return ratio of the fund against both peer group average and the IMA Global sector. Over a three year period the fund has returned (18.7%) against a sector average of (12.6%), while year-to-date the fund has outperformed its peer group, returning 0.5% against a sector average of (0.7%)."
Source: Lipper Hindsight. Bid to bid basis with gross income reinvested. From launch to 30 June 2011. Lipper Global Equity Sector Natural Resources has been used for the sector average. These figures do not include initial charges. If these were included, performance figures would be reduced. Launch date of the fund is 30 December 2005. The full Global Resources portfolio was in place by 4 January 2006. Past performance is not a guide to future returns.
e-fundresearch: "What are the major risks for natural resources equities?"
Olivier Aeschlimann, Fund Manager, "IAM - Gold & Metals A" (08.08.2011): "In the short term, the major risk is a global economic slowdown. However, as said above, we think the demand for metals is structurally robust and we are not concerned about the demand side of the equation. In the longer term, however, we fear the political environment will become less favourable to the mining sector (higher royalties, various taxes and regulations). Cost inflation is also a real threat to the sector as the price of materials and equipment has soared. In addition, it has also become very challenging for companies to find and retain qualified mining engineers and geologists. Over the long run, our main matter of concern is the ability to find new economically exploitable deposits for some metals such as copper, gold, palladium.
All these factors will have to be overcome in order to satisfy the structural demands."
Dr Joanne Warner, Head of Global Resources, "First State Global Resources A GBP Acc" (04.08.2011): "The resources industry is facing significant cost inflation, both capital costs of new projects and operating costs of existing projects as labour, energy and raw materials costs have risen. We have also seen in commodities like copper the average copper grade decline elevates the costs of production. At the same time, demand continues to grow, driven by the ongoing industrialisation in emerging nations. In order to encourage the development of new production at acceptable levels, we need to see commodity prices higher than historical levels for a sustained period of time."
Evy Hambro, Fund Manager, "BGF World Mining Fund A2 USD" (10.08.2011): "A key risk to the mining sector would be a collapse in Chinese GDP or a global recession. Currently the economic outlook for core areas of growth in commodity consumption - China, India and emerging markets as a whole - remain positive. A weakening of growth expectations in the OECD countries should have a limited impact on overall commodity demand forecasts. With the sell-off we have recently seen, mining company valuations look extremely attractive both with respect to earnings and cash flow multiples, as well as Price to NAV. Additionally, the balance sheets of the mining sector are now significantly stronger than they were in 2008 which has led to increased dividends and share buybacks."
Dominik Issler, Regionenleiter Mitteleuropa, "Martin Currie GF Global Ressources USD" (11.08.2011): "For most producers of upstream commodities, the risks relate more to demand than supply which remains generally constrained. There are examples of over-capacity downstream, notably in steel.
A weaker demand environment will be most damaging to companies with high costs and weak balance sheets. The strong are likely to get stronger.
Over the next 12 month period we see mixed fortunes within the subsectors that exist in the global resources universe.
The outlook for mining is extremely challenging. Cost pressures in almost every area – labour, energy, parts, capital – are substantial and growing. Consequently, our exposure here is confined to a few stocks that demonstrate certain characteristics that are crucial to survive this harsh environment. These attributes are high volume growth and valuable by-products – both of which help sustain margins through difficult times – and efficient use of capital.
The outlook for the chemicals sector has deteriorated. A combination of higher raw materials costs and weaker end-user demand should see pressure on both sales and margins over the next several quarters. With many stocks back at highs, valuations look unsupportive against a change in earnings momentum.
These are a couple of example where we see challenges and risks ahead, but we also believe our team is well positioned to find value across the entire global resources universe."
All data per 29.07.2011