The Baker Steel Resources Trust – which has lost nearly three quarters of investors’ money – is asking for clients to pile in millions more in an audacious call that the commodity slump will soon be over.
The investment trust, managed by David Baker and Trevor Steel, has lost investors 72.3 per cent in the past three years, according to FE Analytics.
Investors have been fleeing from anything related to commodities in the belief that the ‘super cycle’ sparked by China’s rapid growth had come to an end.
The £31.4m trust is planning to increase its assets sixfold through a £79m share issuance and a further £100m capital raising to be outlined at an extraordinary general meeting later this month.
The managers have embarked on the fundraising spree in order to invest heavily in the asset class, which they believed was “near the bottom” in terms of performance.
Mr Steel thought the “resources and mining shares market is at or close to its lows over the cycle”.
He said: “We have had four years of underperformance versus the general market and very significant declines in equity valuations.”
While he admitted it was impossible to call the exact bottom, he said with valuations as low as had been seen in many years, much of the “smart money” in the private equity space was also poised.
“We are at or somewhere near the bottom,” he said.
“Whether we have actually seen it or whether we will in another six or 12 months, I don’t know. But the risk-reward of the potential upside looks positive.”
He thought the current conditions would not “last forever”.
“The sector is on its knees and we would like more capital to take advantage of that.
“In growing the size of the trust – both through capital raising and the acquisition of common assets – it increases our bargaining power,” he added.
The trust floated on the stock market five years ago and now invests in a core portfolio of 12 companies, including unlisted companies, private opportunities and strategic positions in listed firms, which Mr Steel described as special situations.
Mr Steel said with the new money he would be interested in adding a handful of development-oriented stocks, of which he had already identified a pipeline of potential names.
“There is very little competition in our space and it gives us an opportunity to do attractive deals,” he said.
“It might be companies that need the last bit of capital to get their projects into production, or if they have a lot of debt. We can get involved in refinancing that debt – effectively exploiting that weakness – and getting in at a good entry point for our investors.”
He said that while the sector could continue to fall, he wanted to raise the money now because the risk of waiting to get the deals done at a better price was too great.
“It takes time to get these deals done, and if you wait until the market has turned you may miss the opportunity.”