UK funds suffer as mining shares fall
Fund managers with mining exposure have taken an unexpected hit to performance after the sector has fallen by 10 per cent in 2011 so far, in spite of commodity prices having rocketed to record highs.
While the FTSE All-Share index of UK equities was up 2.5 per cent in 2011 so far, as at Friday last week, the FTSE All Share Mining index had shed a total of 9.7 per cent.
The falls came as the gold price has risen from $1,405 to $1,508 over the same period – a 7.3 per cent gain – and hit several historic highs in the process. Silver is up from $30.6 to $39.2 over the period, a rise of 2.8 per cent.
Fund managers said the situation was an example of a unusual breakdown in correlation between the prices of commodities and related equities.
Evy Hambro (pictured), manager of the £2.9bn BlackRock Gold and General fund that predominantly buys mining stocks, said “There are periods of divergence in all relationships”.
“Over the last few months, gold shares have significantly underperformed the price of gold. As for mining shares, the divergence has been less so until recently where we have seen prices fall relative to the commodities.”
But he admitted that there was no change in market fundamentals that could easily explain the breakdown in correlation between miners and commodities.
He said: “For it to happen for a long period of time would be rare.”
He added the gold equity correlation breakdown was also severe in sterling terms, with gold prices up 1 per cent so far this year compared to a 14 per cent fall for equities.
Graham Ashby, manager of the £149.1m LV= UK Equity Income fund, has been adding mining positions in recent weeks, including in London-listed copper giant Antofagasta.
He said valuations in the sector “varied enormously”.
On Antofagasta, he said: “The share price is discounting that the good returns the company is currently making will go down to the cost of capital. When you think where the copper price is, we think that is very unlikely.”
Antofagasta shares have fallen by 24 per cent in 2011 so far from £1,524 to around £1,155 as of Friday last week. Rio Tinto has fallen by 6.3 per cent from £4,427 to around £4,146 on Friday.
Barings’ £46m UK Growth fund manager Chris Hyde said he was broadly neutral in mining which had caused a “slightly negative impact” on performance.
He said: “Even though commodity prices have been strong until recently, mining stocks have derated because the market thinks prices are unsustainable.
“This is why stocks have underperformed commodities.”The equity price falls come as vindication for big-name managers such as Invesco Perpetual’s Neil Woodford and Fidelity’s Sanjeev Shah, who suffered performance lags in the last quarter of 2010 as the mining sector rallied sharply.
And while the miners are down, more defensive UK sectors have risen this year so far with healthcare and tobacco – both favourites of Mr Woodford and Mr Shah – leading the way. The FTSE All-Share Health Care index has risen 9 per cent while FTSE All-Share Tobacco has risen by 12 per cent.