First State manager believes understanding assets is vital to performance in resources
Joanne Warner was named Resources Manager of the Year for her First State Global Resources fund at Investment Week’s 2010 Fund Manager of the Year Awards last month. First State also picked up a Specialist Group of the Year award.
Warner, who has managed the fund since December 2006, believes her focus on high-quality companies with strong track records of consistent earnings growth has helped drive performance.
Launched in October 2003, First State Global Resources is up 116.8% over five years to 26 July, compared to an IMA Specialist sector average of 78.4%, according to Morningstar.
Over three years, the £596m vehicle is up 20% compared to the sector increase of 11.4%. Over one year it is up 31.4%.
Explaining her stockpicking style, Warner says: “We are looking for something a company has got under its control that is going to make the earnings per share go up over the next three to five years.”
She adds: “We know there is a commodity price cycle and do not think we are particularly good at forecasting short-term news in commodity prices. So we do not tend to swing our portfolio around dramatically from one commodity to another.”
Instead, the manager maintains a well diversified portfolio across a range of commodities such as energy, gold, precious metals, coal and base metals.
The fund holds a maximum of 75 companies, but Warner says the top 10 stocks tend to represent around 50% of the weighting.
The portfolio is also well diversified in terms of geography. Warner says this is a way of reducing the political risk, a strong feature for many mining and energy companies.
A big contributor to performance over the last year has been the fund’s positions in gold stocks. Other strong performers include a number of growth companies, which the manager says have tended not to be the big names. Examples include Redback Mining, Eldorado Gold and E.ON Resources.
Warner says she also has positions in a number of other gold companies, which are still at the development stage.
She explains: “They have identified projects and are either in the process of funding them or at the early stages of construction. It is really the wealth-creative phase of their company cycle.
“And we own those companies not just because they are gold companies; our weighting to the precious metal sector has not changed dramatically in the last 10 years.”
The fund’s benchmark is 75% HSBC Global Mining and 25% MSCI AC World Energy.
“Historically, we have had a bit of an overweight position in precious metals but that really reflects more the opportunity set within this sector,” Warner says.
The manager points out there are a lot of companies to choose from in the gold and precious metal sectors.
“One of the reasons for this is the barriers to entry are relatively low,” she says.
“You do not have to be a very big company to find and finance an economic gold deposit and it is a lot easier to find a growth company in gold than it is in coal or base metals.”
Warner is part of a resources team of nine investment professionals, which includes geologists, metallurgists, chemists, petroleum engineers and mining engineers.
She attributes Global Resources success, relative to its peers, to the strength of this team, along with performing exhaustive due diligence on companies.
“At the end of the day, we add value by really understanding the dynamics of the assets within companies, because we have spoken to the people who operate them,” Warner says.
“This is extremely important for resources, because there are very few businesses that have as much variability in the revenue line as a resource company.”
Warner adds: “Every asset has a completely different set of sensitivities, and part of the art is to understand what the sensitivities are.
“You then have to decide how much you should pay for that opportunity and the appropriate risk/reward balance.”
Warner believes in three to five years’ time people will look back and says this was a golden period for buying commodity stocks.
“I do not know if there are going to be any more global economic shocks, but if the world continues to go along the way it does, I think there is a lot of downside already factored into share prices.”
Quality companies are, she says, in good shape – tending not to have high debt levels, as many did at the time of the financial crisis, and have been busy raising capital.
Warner points out balance sheets and margins for commodity stocks are also both generally good.
“For example, if you go onto Bloomberg and look at consensus earnings for Xstrata in 2011, its earnings are on 6.6 P/E,” she says.
“That is the sort of price you would pay for a company that had no growth and was expecting to disappoint very dramatically in terms of earnings.
“And yet, when I look at commodity prices, they are really not bad. There are just very few customers at the moment, with China being the largest.”
Warner also says she cannot imagine a scenario where there will be no growth for ever in the developed world.
“Certainly, the developing world has been taking up the market share of the volume that has been displaced from Europe and North America.
“Companies have got pretty good margins and are making good money – they are not looking distressed but are being priced as if they are. They are being priced as if things are going to get a lot worse from here.”
