JPMorgan Natural Resources Accumulation Units

Our view on this Fund

Having performed strongly for a number of years commodities and related stocks have suffered somewhat in the recent market falls. Even mining, which was one of the best performing sectors over the last year, has suffered a setback over the last month. Some commentators believe the commodities bull market has come to an end. We believe there could be further volatility in the short term but the long term growth story still looks strong.

One of our favourite funds investing in this area is JP Morgan Natural Resources. We spoke with the manager, Ian Henderson, for an update on how the fund is positioned and his outlook for the sector.
There are currently several key themes driving the portfolio. The fund’s biggest exposure to a single sector is energy at about 30%. This includes oil, coal and uranium. The other largest weightings are in gold & precious metals, and base metals. These account for just under 60% of the fund. In addition there is a small exposure to ‘soft’ commodities, such as grain and palm oil; and precious stones, like diamonds which have enjoyed a rally recently. There is a small amount of cash in the fund. The main themes are outlined below.

The first is energy. Ian Henderson believes lack of supply is the main driver behind the recent high oil price, although speculation from investors looking to capitalise has also contributed. Saudi Arabia and Nigeria have interrupted supply, Mexico has had production problems, and a change to the tax situation has meant Russia has also struggled with production. He also believes that the major oil companies act in their own interests, not in their customers’, so they are likely to want to keep the price of oil high.

The oil price recently reached an all time high of $145 per barrel but Ian Henderson believes this has done little to dampen demand. For example the number of cars in production continues to grow, accounted for partly by the population in some emerging markets which is growing wealthier and spending more. Energy use generally is expected to rise as the world develops and therefore the manager expects the oil price to remain high, although he does expect there to be some volatility in the short term.

Gold has also retreated from its recent high of $1,032 per ounce but Ian Henderson believes the appetite for this precious metal will continue to grow over the long term. One reason for this is the wealth that is accumulating with governments in the Middle East and emerging economies like China and India. Some of this wealth is likely to find its way into gold. Gold can be a good diversifier for government portfolios that often invest in a wide range of assets. Just a fraction of these wealth funds will amass to billions of dollars that could pour into the sector, which could help drive the price higher. Ian Henderson believes the gold price could rise back above $1,000 an ounce and gold mining and related companies, where the fund invests, could benefit.

The economic slowdown that has started in the western world has had a minor impact on world steel production growth; the sector is still growing, just not quite as fast. Ian Henderson believes, however, that the sector will still perform in the long term as demand from the emerging markets continues. The price of the commodities involved has risen, such as iron ore, and hard coking coal that is used in the steel manufacturing process.

Although there is some exposure to larger firms the fund continues to invest predominantly in higher risk smaller companies. It is the manager’s opinion that this is where there is the most growth potential. Smaller companies have the potential to grow into the larger firms of tomorrow, but they are also potential takeover targets for larger firms. An easy way for a larger company to gain access to, for example, existing mines or resource supply is to simply buy another smaller company that has already done the hard work.

Smaller companies have generally suffered in the recent market volatility, although this is to be expected. This has been reflected in the fund. Ian Henderson believes some of these fallen stocks now look excellent value and he is taking the opportunity to top up his holdings.
Ian Henderson believes commodities prices will continue to rise. Research from Citigroup indicates $2.2 trillion will be spent on infrastructure in the next five years. This includes huge projects, like roads, ports, underground railway networks, and power facilities. These projects are government-led, and as wealthy emerging countries continue to develop spending in this area is likely to continue.

21-07-2008