A major investment theme in recent years has been the rise in commodity prices, whether it be oil (the most visible to the consumer via the petrol pump), copper or aluminium. Demand for commodities has been driven by the development of emerging markets, particularly China, now a major global economy (the fourth largest in the world, having overtaken the UK last year).
The Chinese economy needs raw materials from across the globe to fuel its growth. As the rural exodus to the cities continues, factories need commodities to produce goods. And as the newly arrived workers spend their wages, there will also be demand from China as a market in its own right. For example, a rising middle class with a growing disposable income will want to buy cars; cars require steel, which in turn requires iron ore. Spending on infrastructure is also impressive with huge expansion in the road and railway networks. The Chinese government aims to quadruple real GDP between 2000 and 2020. There is little sign that the pace will slacken, so it is no surprise that some talk of a commodities super-cycle lasting over 20 years.
The above covers the demand side of the equation. But what about supply? When commodity prices were low throughout the 1980 and 1990s, there was little investment in new capacity or new discoveries. The last major oil-field discovery was more than 20 years ago. Nor is this situation likely to change in the near future. It takes around seven years for a new mine to come on stream given environmental considerations and construction lead times. That means it is often more efficient for producers to buy other companies rather than expand their own production; witness the bid battle between aluminium giants Alcoa and Alcan, for instance.
One of the easiest ways to play the commodities bull market is the JPM Natural Resources fund managed by Ian Henderson. The fund invests in a wide range of companies involved in the production and marketing of base metals, energy, gold and other precious metals. Over the past couple of years it has produced some excellent performances (up over 36% in the past year) and offers exposure to a diverse range of companies and hence commodities.
Two funds with a more specialised investment remit are the CF Baker Steel Gold fund and the Investec Global Energy fund. Baker Steel Capital is a specialist natural resources fund manager with offices in London and Sydney, providing a global perspective. The team includes individuals with actual mining engineering experience who undertake their own due diligence on gold mines around the world. This allows them to build their own in-house models rather than depend on broker research. Worldwide gold production is not being helped by a lack of new discoveries, whilst demand is growing, not just for jewellery but also for gold exchange-traded funds and commodity funds.
The Investec Global Energy fund concentrates on one specific theme, energy. It invests in companies around the world involved in the exploration, production or distribution of oil, gas and other energy sources. Its performance is geared to the oil price. The supply/demand fundamentals look good. As already mentioned there have been no significant new oil finds, whilst demand will grow as oil consumption per head in emerging economies grows.
The funds Simon Brett likes
Fund, Annual fee, Contact details
JPM Natural Resources, 1.5%, 0800 204020
Investec Global Energy, 1.5%, 0207 597 2000
CF Baker Steel Gold, 1.85%, 0207 963 8100