Some investors have been cashing in their gains from energy and resources funds in recent months, but the top-rated manager in the sector says the boom isn’t over and there is more money to be made.
The scale of the resources boom is staggering. Almost everything you look at has soared in price in recent years. Foodstuffs like soybeans (up 60% over a year) and corn (up 70%), base metals like copper (up from £2,000 to £8,000 per tonne in 6 years), nickel (trebled in three years) and tin (up four times since 2000), precious metals like gold (up 30% in a year), and of course oil, up 45% over a year and more than doubled over three years.
While that is bad news for us as consumers, it has been good news for investors, who have more than trebled their money over 5 years in JP Morgan Natural Resources, the leading fund in the resources sector.
"Irrational market sentiment"
But with some managers recently selling out of resource stocks and prices of most commodities and metals well below their spring 2008 peaks – the average fall is about 25% - is the boom over? Not according to Ian Henderson, who looks after £1,800 million in JPMorgan Natural Resources fund. He says that “irrational market sentiment is causing a sell-off” and that “the long-term investment case is as strong as ever.” In fact he claims that mining and energy stocks have not been this cheap for a decade - because though their share prices have risen, their profits have risen even more.
It is of course the boom in the developing markets, especially China and India that underpins the resources boom. They are importing vast quantities of energy, metals and foods and will continue to do so for many years. To make their economies more efficient they are investing mind-boggling sums in infrastructure development - roads, railways, airports, power stations, water treatment, hospitals, schools - which means a big ongoing demand for energy and metals.
At present, China’s economy is running at a slightly slower pace than in recent years but both China and India are expected to see economic growth of 8-10% a year over the next few years. Meanwhile Brazil too is booming and those African countries that are rich in oil or minerals are also beginning to see the wealth effect of higher resource prices.
Massive exploration boom
A massive new exploration boom is under way across the whole world as companies seek out new sources of oil, gas, platinum, gold, copper, uranium, tin and many other basic materials, while farmers cash-rich from higher prices have capital to invest in improving productivity.
A good feature of this exploration rush is that a lot of it is being done by smallish companies, so that when they do strike gold/oil/platinum/whatever the price of their shares can really rocket.
Ian Henderson aims to benefit from this by holding a very wide range of shares. In fact JPMorgan Natural Resources now holds shares in an amazing 340 companies worldwide, about three times as many as a typical unit trust. There is only one name in its top ten holdings that most UK investors will recognise, the mining giant BHP Billiton.
Trust the experts
But as for Lihir Gold (Papua New Guinea), Kinross Gold (Canada), Addax Petroleum and Weatherford International, you will just have to trust that Ian and his team have done their research and think they have found value that other investors have yet to recognise. The trust’s record - up 72% over 3 years and 237% over 5 years – shows that they are usually right.
The only other major fund in this sector is First State Global Resources, which has only a 3-year track record and holds more in industrial commodity-processing businesses and less in energy and mining than JPMorgan. First State Global Resources is up 91.1% over 3 years, and in the past six months it has fallen only 14.6% compared with a steeper fall of 23.5% by JPMorgan Natural Resources.
But short-term performance is always likely to be something of a rollercoaster in the resources sector. The key question is whether a long-term multi-year resource boom is still under way. Ian Henderson is sure that it is. “We urge investors to focus on the very real and tangible opportunities that are yet to be unearthed in this vast sector,” he says. And he adds: “It would be foolish to leave a party before it gets into full swing.”
The JPMorgan Natural Resources Fund is an ideal one for regular savings – see my recent explanation of why regular investing into a fund for several years virtually guarantees you a profit.
Important risk warning - please read
The value of your investment and the income from it can go down as well as up and you may not get back a significant proportion of your investment. Past performance is not an indication of future performance. If you are in any doubt as to the suitability of an investment, you should seek independent financial advice.
