The $8m (£5m) BGF Natural Resources Growth & Income fund was launched in April 2011 and aims to capture the best opportunities across the natural resources sector through both stock selection and allocation between the subsectors of energy, mining and agriculture.
Co-manager Catherine Raw notes the focus of the management team – which includes Desmond Cheung, Joshua Freedman and Tom Holl – is total return, although income remains a key element of the Luxembourg-based offering.
Ms Raw explains: “We take a fundamental approach to our research and combine stock analysis with top-down considerations to construct the portfolio. As part of the top-down component we address questions such as how is the macroeconomic backdrop likely to influence the sector as a whole?”
The manager points out the team can source ideas from any location and is not tied to a particular style bias. She adds that the stock research is the fruits of both quantitative and qualitative work.
“Our research is not confined to our desks – getting onto the ground and visiting company assets and operations is integral to the exercise, even if it takes us to some far-flung destinations,” says Ms Raw.
The process itself has remained consistent since launch, with decisions based on an assessment of factors such as commodity price outlook, valuation, yield and volume of ideas.
She notes: “The subsector allocation is unconstrained, but we are always likely to maintain some exposure to each of the three areas: energy, mining and agriculture.”
Natural resources as a sector has struggled and the performance of the fund reflects this, with a three-year return of just 8.71 per cent, while the return for 2013 is a less impressive 1.97 per cent, according to FE Analytics.
The manager notes the investment horizon of the portfolio spans the medium to long term, although they are “continually monitoring our exposure, sourcing new ideas and trying to ensure the portfolio is appropriately positioned”. According to its key investor information document the fund has a risk-reward level of six out of seven and ongoing charges of 1.04 per cent.
The most recent change to the portfolio has been an increase in the agriculture exposure from 24 per cent of the fund in June 2014 to roughly 31 per cent at the end of September. This was to “capture the strong outlooks for specific animal protein and agribusiness companies – areas that are benefiting from the increased grain volumes and subdued grain prices we are currently seeing”.
Ms Raw acknowledges that the natural resources sector has come under “significant pressure” at various points in the past three years, but argues the relative returns have been strong since inception and the past 12 months have provided a “more favourable backdrop to the sector”.
She notes energy has been the favoured area of the portfolio in the past year, with the subsector accounting for almost half of the portfolio in February.
“The energy subsector was the strongest performing of the three areas over the period and our subsector positioning generated alpha. Energy shares appreciated on the back of a generally supportive commodity price backdrop, good operational delivery from a number of companies, improving free cashflow profiles of the majors and attractive valuations.”
But with oil prices drifting below $90 the commodity sector as a whole could see some additional pressure, and Ms Raw suggests that 2014 “is a year of transition for the natural resources sector”.
Looking to the future, she says: “Being selective is important. Picking the right commodities and the best positioned producers will be crucial.”
EXPERT VIEW
Rob Morgan, investment and pensions analyst, Charles Stanley Direct
Since launch in May 2011 this fund is marginally ahead of its benchmark, the S&P Natural Resources index. Although it remains some way below its launch price, an overweight to energy stocks at the expense of mining and agriculture (each of which make up about a third of the benchmark) has helped the fund weather the rout in the commodities sector in recent years. With a yield of 2.3 per cent, it is unlikely to attract investors that want to maximise income, but with a strong management team it could be of interest to provide exposure to this sector as part of an income-generating portfolio.
