Investec Enhanced Natural Resources Fund research update

Heather Ferguson | Thu 12 March 2015

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Tom Nelson will join George Cheveley as co-manager of the Investec Enhanced Natural Resources Fund following the departure of Bradley George on 1 April 2015. Tom Nelson has several years' experience investing in the energy sector and has been part of the commodity and energy team at Investec since 2012.

The fund invests in companies which the managers believe will benefit from a long-term increase in the price of commodities with a focus on metals, mining, oil and gas, and agriculture. Performance over the past five years reflects the difficult environment in which the fund is investing. The MSCI ACW Select Natural Resources Index has fallen 12.2%, although the fund has slightly outperformed, falling by 10.0%. Please remember past performance is not a guide to future returns.

Amid another year of falling iron ore, coal, copper and oil prices, investors remain cautious. However, the managers feel resources companies currently present an attractive investment opportunity. Many commodities can currently be bought for less than it costs to mine them from the ground, which is not a situation they foresee continuing; mines that are unprofitable for a prolonged period will eventually close, restricting new supply which could lead to rising prices.

For the past two years, many companies in this sector have cut costs and the managers are confident this will lead to higher profit margins when commodity prices recover. The fund's metals and mining exposure accounts for around 25% of the portfolio and is currently biased towards base metals. Base metals are widely used for industrial purposes and include copper, iron, aluminium, tin, nickel and zinc. The fund generally operates a concentred portfolio will allows each investment to make a significant impact on performance however this is a higher-risk approach.

Recently, the supply of iron ore has outweighed demand, driving down prices. This hurt the share prices of holdings in large miners and iron ore producers; however, it benefitted the fund's short position in higher-cost producers. The managers believe lower oil prices could stimulate global commodity demand as industry transport and production costs are reduced, therefore increasing prices. The fund is exposed to this theme through mining companies such as BHP Billiton, Rio Tinto and Glencore; as these companies are currently yielding around 5%, the managers feel the fund is being paid to wait for the capital value of the share to recover.

Within the energy sector, the managers feel many share prices have been driven down to below fair value, including their positions in exploration and production companies (E&P). As the managers feel the oil price will continue to recover through 2015, they have taken the opportunity to increase the fund's exposure to E&P companies at lower prices. Elsewhere, the falling oil price benefitted the fund's short positions in oilfield & drilling companies.

Our view on this fund

Performance has been reasonable during what has undoubtedly been a difficult time for the sector and in our view Tom Nelson and George Cheveley will make a talented team. There are few areas currently more unloved than the high-risk commodities sector and our analysis suggests the mining, oil & gas and basic materials sectors are all undervalued, although it is important to point out this has been the case for the past 3 years and could remain true for some time and prices could fall further.

The fund has been positioned to offer an element of shelter from any further falls in the sector through shorting stocks the managers feel will underperform and they will at times hold a high level of cash; although this could mean the fund may lag its peers should commodity markets rebound strongly and it relies on the managers making the right calls. The fund also has the flexibility to use derivatives should they see fit which increases risk. Investec has removed the fund's performance fee which we view as a positive and will benefit investors. However, the fund does not currently feature on the Wealth 150 list of our favourite funds across the major sectors.

Find out more about this fund including how to invest

Please read the key features/key investor information document in addition to the information above.