The commodities and mining sector has experienced a torrid time since Neil Gregson took over as manager of the £934.7m JPM Natural Resources fund in January 2012.
Under his management, the philosophy behind the fund and the investment process have remained the same.
He says: “This is a buy and hold strategy. We take a strategic view so a longer term view, it’s stock driven and we believe that the way to outperform in the longer term is to own companies that can grow.
“So essentially companies that can grow through successful exploration, product development and acquisitions but at the right price, all leading to growth and production.”
Mr Gregson explains that this results in a strong bias to small and mid cap companies, which means there is an “element of increased volatility”, although he acknowledges that it is a volatile sector. Perhaps this is why the fund has been placed at the riskiest level on a risk and reward profile at level seven, while the ongoing charge is 1.68 per cent.
The manager reiterates his stock driven approach to investing and emphasises that he aims for growth at a reasonable price when choosing holdings for the portfolio.
“We do asset allocation within broader resources but our neutral position is a third in oil and gas, a third in precious metal miners, predominantly gold but platinum and silver, and a third in other mining,” he notes. “But we have bands of 15-50 per cent in those three broader buckets.”
Mr Gregson says he went underweight precious metals at the beginning of 2013 and reveals the portfolio is now at the 15 per cent minimum. He adds the portfolio now has more of an overweight in mining and is neutral in oil and gas.
While the investment process has been consistent, he points out that the number of holdings has declined.
“We had approximately 280 different companies, we’re currently at roughly 130, so there’s a significant net reduction in a number of investments but the portfolio is still very diversified,” he reasons.
“A significant amount of the reduction in the number of holdings was through us reducing our investments in the gold sector.”
He suggests that “the lion’s share” of the reduction came through an asset allocation decision and his decision to focus on lower cost gold companies.
Mr Gregson continues: “We think about the macro environment as part of asset allocation but really what drives our allocation at a commodity level is, what is the supply side situation?” Because the price of something goes up a lot, if it’s easy to bring on more supply then that will happen and the price will come down, and there will be less profit.
“An example of that this year is nickel where the Indonesia removed their ore from the market and we saw nickel prices improve substantially.”
Mr Gregson observes the industry, particularly the gold and mining space, has been in a prolonged bear market since 2010.
He notes: “We’ve had three years of negative returns in the mining sector… and this year started off with a bit of a recovery but in September we had a relapse, which was more emerging markets and the dollar specifically, but the mining sector got caught up in all of that.
“It’s been a very long unprecedented period of poor performance over recent years and with our approach, particularly in small and mid cap, we tend to suffer more in the down market as the smaller caps tended to underperform.”
Against this backdrop, the fund has underperformed. According to FE Analytics, it recorded a loss of 34.65 per cent in the three years to October 8 2014. Its benchmark, the Euromoney Gold Mining and Energy index, generated a loss of 23.88 per cent over the same period.
In the last 12 months that was 7.81 per cent, compared to a loss of 2.98 per cent from the index.
In spite of the disappointing returns, Mr Gregson believes the sector has been through the worst and that “there are better times ahead”.
He adds: “We see it as unloved, it is very out of favour but we think the fundamentals are pretty strong. So at a stock level, when we look at stocks in our portfolio [we see] robust balance sheets, still decent margins, we think commodities are poised for a recovery because generally inventories are low.”
EXPERT VIEW
VERDICT
Rob Morgan, investment and pensions analyst, Charles Stanley Direct
This has a long history going back to the 1970s, and it remains one of the go-to funds in the sector. That eminent history hasn’t helped recent performance, though. The fund has underperformed its benchmark over the past three years. For me this is not a huge surprise. Historically, relative performance has been better in bull markets for commodities, but it is still disappointing that it hasn’t been more resilient given its diversified approach and some energy exposure.
