The resurgence of the commodities complex has failed to win over Liontrust Asia Income managers Mark Williams and Carolyn Chan, who believe too much good news has been priced in for the space.
The problems facing commodity investors have eased in the past 18 months, as pressure on the oil price has lessened and momentum has built more generally behind cyclical names.
According to FE Analytics, the Bloomberg Commodity index lost 17.9 per cent in sterling terms over three years. But over the past 12 months its fortunes have reversed, with the index gaining 18.8 per cent.
The Liontrust pair noted commodity strength and global growth more broadly could benefit exporter countries in which they are invested. However, the managers, who aim to produce a prospective yield of at least 1.1 times that of local markets as well as achieving long-term capital appreciation, continue to steer clear.
“A lot of the areas that have performed incredibly well are areas like commodities,” said Mr Williams. “We think markets are factoring in too much recovery. Things like Trump’s infrastructure spending plans aren’t going to have an immediate impact. In the medium term it’s going to be marginal.”
Instead, the team is focusing on the potential for increased consumer spending in emerging markets. One area that appeals is in India, although high valuations have proved themselves a hindrance.
“The reason we don’t have more [money invested there] is valuations look too stretched, particularly in some of the companies we would like more exposure to,” said Mr Williams.
“Those companies are trading at about 30 times forward earnings. Our portfolio is trading at about 13 times earnings.”
The fund had just 2.8 per cent in India at the end of February. Another minimal weighting, at just 1.5 per cent of the portfolio, is to Korean stocks. In recent months the country has looked poised for change, with political figures promising to reform the nation’s largest family-run conglomerates.
But Korean corporates’ lack of interest in paying dividends remains a headwind despite attempts at reform.
“Our dividend yield is about 4.5 per cent,” said Mr Williams. “They are making changes, but pay out very low dividends, even if those are growing quite quickly.”
More generally they have been topping up on names such as computer storage devices firm Lite-On and Advanced Semiconductor Engineering.
