M&G’s French cuts commodities as 2012 returns disappoint

06 Mar 2013 | 07:34
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M&G’s Graham French has been selling down his exposure to commodities after falling prices and a ‘poorly managed’ sector hit the performance of his Global Basics fund last year.

French, who has run the £5.2bn fund since 2000, apologised to investors for his performance last year after lagging the sector substantially.

Global Basics has returned just over 1% over the past 12 months, leaving it bottom quartile of the IMA Global sector over that timeframe, as the majority of funds posted more significant gains.

French's relatively large weighting to commodity plays hurt performance, particularly in May, when the fund dropped almost 8% as forced selling hurt resources prices.

The manager acknowledged he should take "a bit of marginal criticism" for holding companies "we probably should not have owned" within the fund in 2012, but said his problem positions were now down to a minimum.

"There are two or three companies we probably should not have owned, but we did. The commodities cycle was coming to an end, and we have to take a bit of marginal criticism. But over the last 6-9 months this fund has done very well."

French said he had been able to achieve a positive return after "panicking early" and cutting his exposure to resources companies.

"If you are going to panic, panic early. We panicked earlier and got rid of our problems, hence why we produced a positive return last year," he said.

French has now cut exposure to resources companies within Global Basics, with significant 2012 disposals in oil & gas exploration firms like African Petroleum and Tullow Oil, as well as a variety of gold miners including Newmont Mining.

Mining, energy and precious metals companies now make up just over 15% of the fund, well down on the portfolio's historical levels of commodity exposure.

The manager is deeply critical of the "abhorrent" capital expenditure write-offs seen at major miners, such writedowns having reached $200bn over the past 18 months alone, according to internal M&G figures.

"The industry has over-capitalised itself. We are already up to about $200bn of capex that has had to be written off by the industry over the past 18 months. That is an abhorrent figure, and has been a consequence of poor management, nothing else. The industry needs to put its head down in shame for that."

"At about 4% of the fund, we are now at a stage where none of these [remaining challenges] are going to hurt us," he added.

Those challenges include positions in Hochschild Mining, where Argentinian profits may be repatriated by the state, and Aquila Resources, involved in a dispute over budgets with a joint venture partner.

Though he retains some commodity plays in the core of the portfolio, French has also been buying more consumer-focused stocks, with consumer goods and services now making up over 25% of the Global Basics portfolio via holdings such as Unilever and PZ Cussons.

Agriculture and food ingredients firms have also become more significant parts of the portfolio, accounting for around 24% of the fund as of end-February, the manager seeing such companies as a play on both emerging markets growth and the stability of food supplies.

"The horsemeat scandal in Europe is just another example of the importance people are going to put on the safety of food," French said.

At 6.1% of the portfolio, ingredients manufacturer Symrise is currently the fund's largest single position. French described the ingredients story - another way to play growth in emerging markets - as a "real sweet spot" for the fund.

Categories: Commodities

Topics: M&gCommoditiesGraham french

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