IN­VESTEC COM­MOD­ITY FUND

Financial Mail - Investors Monthly - - Analysis: Resources Funds -

Fund manager Kobus Nell thinks the cur­rent dy­nam­ics in the iron ore mar­ket mean it will take a long time for the in­dus­try to re­cover. “Higher-cost pro­duc­ers are go­ing to strug­gle be­cause a hand­ful of low-cost pro­duc­ers have been able to in­crease sup­ply and dras­ti­cally re­duce their unit cost. BHP Bil­li­ton and Rio Tinto dom­i­nate with their col­lec­tive 50% of global iron ore sup­ply. Bil­li­ton, we un­der­stand, will pro­duce at less than $18/tonne in fi­nan­cial 2016, and we are ex­pect­ing Rio to be be­low this unit cost level.”

The two have vowed to con­tinue in­creas­ing sup­ply, de­spite fall­ing prices, to win mar­ket share and en­trench their long-term po­si­tion. “Based on this view, we don’t own any Kumba or As­sore,” says Nell. But it’s not just the com­pe­ti­tion that wor­ries Nell about Kumba. “While the com­pany used to en­joy good mar­gins, it has fallen be­hind its peers on devel­op­ment and cost is now struc­turally higher. So our pre­ferred play is Bil­li­ton.”

Six per­cent of the fund is in­vested in Glen­core. “It’s the ma­jor with the high­est ex­po­sure to cop­per, which we like, and it also has a mas­sive ex­po­sure to ther­mal coal,” says Nell. He thinks coal is fur­ther down the re­struc­tur­ing path to sup­ply-de­mand equi­lib­rium than many other com­modi­ties.

“Be­sides the com­mod­ity mix, we also like Glen­core be­cause the man­age­ment team has real ‘skin in the game’. We are also at­tracted to its trad­ing busi­ness, which is the largest in var­i­ous cat­e­gories in the world and rep­re­sents a third of its prof­its on a nor­malised ba­sis,” says Nell.

Un­like the type of pro­pri­etary risk many peo­ple as­so­ciate with trad­ing, Nell de­scribes Glen­core’s ca­pa­bil­ity in this re­spect as more an “agency” type of busi­ness. “Maybe 10% of its book is pro­pri­etary risk. The rest is lo­gis­ti­cal — col­lect­ing ma­te­rial from mines and de­liv­er­ing it to industrial clients. It fi­nances a lot of th­ese trans­ac­tions too.”

The fund has a “re­spectable” weight­ing in plat­inum through Im­pala Plat­inum, Royal Bafo­keng Plat­inum and Northam Plat­inum, and the phys­i­cal pal­la­dium ETFs. “The in­dus­try looks very grim, and has been go­ing through a tough time for a while now. But we are en­cour­aged that the stock-to-use ra­tio is fall­ing,” says Nell. The stock-to-use ra­tio refers to the in­ven­tory of re­fined plat­inum above ground di­vided by to­tal an­nual de­mand. So as this ra­tio falls, the mar­ket moves closer to a fun­da­men­tally sup­ported mar­ket.

“Pal­la­dium has been in a large deficit for a while — ev­ery year the stock lev­els are fall­ing and de­mand is grow­ing. De­mand for plat­inum has also been grow­ing. His­tor­i­cally, the stock-to-use ra­tio has been a very good pre­dic­tor of where prices are mov­ing. So we think the mar­ket is al­ready turn­ing,” says Nell.

Royal Bafo­keng Plat­inum is one of the more un­usual picks in re­la­tion to the fund’s peers. “We have been a holder since the list­ing, we like the qual­ity of the as­set, and we like the sta­bil­ity the com­pany en­joys with its work­ers and the broader com­mu­nity,” says Nell. He has also been im­pressed with the man­age­ment team.

The fund has cho­sen to get most of its ex­po­sure to gold through its off­shore hold­ings. “We own Rand­gold Re­sources and Royal Gold, both of which are listed in Lon­don. In the US, we own a com­pany called Fres­nillo which was more re­cently in­tro­duced into the fund,” says Nell.

An­other un­usual pick has been Vedanta Re­sources. “It is a Lon­don-listed base met­als and oil pro­ducer which presents an at­trac­tive val­u­a­tion en­try point, but not a tier one com­pany,” says Nell.

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