Investec Enhanced Natural Resources P Accumulation

Our view on this Fund

Commodities, especially oil, are making the headlines again. However, this time it is because the price is moving down rather than up. So the key question is whether we have reached the end of the commodity boom. The first point should be to put these things in perspective: the oil price has experienced short term falls of around 20% on twelve occasions since 1999, but overall the price is massively higher over that period. So the current volatility is hardly an unusual event.

We should also remember that the recent surge upwards in the oil price always looked unsustainable in the short term; at some stage a price shock of that magnitude is bound to effect consumer behaviour and the price will correct. We have seen evidence of this in America and the UK, and also in emerging markets where oil subsidies have been reduced or taken off altogether.

People are now saying that with global growth falling the demand for commodities must ease. On the surface that seems like a perfectly reasonable conclusion, but my own view is rather more optimistic. Generally speaking the supply/demand equation is still supportive of high prices. In past global economic slowdowns we have never seen big demand from emerging markets; however now they are generating huge domestic demand for commodities and this cannot disappear overnight.

Now clearly these nations don’t live in a bubble and their economies must surely slow down to some extent too. I don’t know how long the pause for breath in commodities will last, but as I have stated in previous columns I believe we are witnessing a huge industrial revolution which is going to have a massive effect on the world. The western industrial revolution had a huge effect on the globe and this is far bigger.

One company that has been putting great emphasis and commitment in this area is Investec. They have launched a number of commodity-related funds, but I thought I would bring to your attention the one they launched in May this year: Enhanced Natural Resources.

Investec boasts a resource team of ten with combined experience of 80 years, headed up by Bradley George. Mr George himself has twelve years experience in this field, having joined Investec in July 2006 from Goldman Sachs. The fund is co-managed by George Cheveley who joined the team in 2007 as a metals specialist and was previously an analyst for global mining giant BHP Billiton.

The fund can choose from over 800 shares and exchanged traded commodities, but what makes it unusual in this sector is that it can also ‘short’ (giving it the potential to profit when prices fall). The goal behind shorting is to reduce the portfolio’s overall volatility and smooth out some of these big corrections that we see in commodities. The fund is likely to hold 10-15 commodity positions (i.e. the actual commodity itself) and somewhere between 30 and 35 shares. Remember that the commodity itself and the equities don’t necessarily move in tandem with one another. The team look very carefully at the supply/demand situation for each commodity, which assists them in forecasting potential trends. Alongside this is their equity research, which grades companies on such things as earnings estimates, valuation, asset quality, momentum and capital management. These two aspects of research are put together to highlight areas of opportunities in the market.

The team remain of the opinion (as do I) that commodities, particularly energy, are a massive long term investment story. Such cycles usually last for around 15 years, and as this one started in 1999 that suggests we could still have a long way to go. However, as with any bull market prices can still fall – and fall dramatically – along the way. Those with long memories will recall the stock market crash of 1987, which felt like Armageddon at the time but now looks like a mere blip on the charts.

Those who want a more defensive fund may wish to consider the Investec Enhanced Natural Resources Fund. The fund got off to a poor start, and actually fell sharply in July. In defence of Messrs Bradley and Cheveley the extreme volatility seen in the sector would have made anyone’s life difficult. It is too early to say whether the fund will be a success, but it is certainly an intriguing concept and one I will be keeping my eye on in future.

02-09-2008