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----------------------------------------------- Energy fund invests in farm stocks
Emerging economies to fuel food market, manager says
Posted by the Asbury Park Press on 07/1/07 BY OLIVER LUDWIG
Evan Smith and Brian Hicks are buying agricultural stocks after shares of oil and mining companies made their U.S. Global Investors Inc. mutual fund the top performer over the past five years.
The $1.3 billion Global Resources Fund owns shares of fertilizer makers Potash Corp., Agrium Inc. and Terra Industries Inc., which surged by an average 175 percent during the past year through June 19. Eight of the fund's 10 biggest holdings are still energy companies, which together rose by an average 50 percent in the same period.
Adding farm-related stocks reflects the fund managers' view that the commodities bull market that started in 2002 has grown beyond oil and gas companies. Farmers worldwide are using more crop nutrients as demand for food increases, and more raw materials to make fuel including ethanol and biodiesel.
"Agricultural commodity prices have lagged behind the performance of the hard commodities, oil and metals and such, so we could get a multiyear move on the agricultural side," Hicks, 40, said in an interview from his office in San Antonio.
The Global Resources fund has returned an annual average of 38 percent in the past five years, ranking first of 23 in its peer group tracked by Bloomberg. It has climbed 37 percent in the past year, compared with the 26 percent gain of the Standard & Poor's 500 Index of the largest U.S. companies.
The fund has a rating of four out of a possible five stars from fund research company Morningstar Inc. Its Sharpe ratio at the end of May was 1.49, compared with 1.17 for all resources funds. A higher Sharpe ratio indicates better risk-adjusted returns.
Asset mix
Energy companies account for about 55 percent of the Global Resources fund's assets, and agricultural companies, including Brazilian sugar-and-ethanol producer Cosan SA Industria e Comercio, add up to around 2 percent.
Companies that grow and process agricultural commodities such as sugar or corn are a new way to take advantage of rising energy prices, according to James Rogers, chairman of New York-based Beeland Interests Inc. He founded the Quantum Hedge Fund with George Soros three decades ago.
Rogers said in an interview last month that investors should avoid most asset classes, except for agricultural commodities. He has been bullish on the market since at least 1999, when he forecast a 15-year boom in commodities.
Demand for commodities from energy to building materials to food will remain robust because of demand from emerging economies led by China, India and Brazil, said Smith, 36, who graduated from the University of Texas at Austin with a bachelor's degree in mechanical engineering. Hicks earned a master's degree in finance at the University of Colorado.
Emerging economies
China's economy grew at an annual rate of 11.1 percent in the first quarter. A Brazilian central-bank survey forecast that Brazil's economy will expand by 4.25 percent this year, up from 3.7 percent in 2006, buoyed by demand for commodities.
"There's still plenty of upside potential," Hicks said. "This is a structural bull market for commodities. Supplies are constrained, whether it's due to shortages of skilled labor, raw materials, equipment or just delays in permitting" for building new industrial plants.
Saskatoon, Saskatchewan-based Potash, which makes up 0.2 percent of the fund's holdings, reported record first-quarter earnings, prompting Chief Executive Officer Bill Doyle to say the company was at the "front end" of consumption growth. The stock jumped 187 percent in the past year including currency conversions. Shares of Calgary-based Agrium climbed 106 percent with currency adjustments and Terra of Sioux City, Iowa, soared 255 percent.
Brazil to China
The fund made most of its gains in the past five years from oil companies. Houston-based Schlumberger Ltd., the world's largest oilfield-services provider, is Global Resources' top holding. Its shares have more than tripled since June 2002, driven by China, which has accounted for a third of the global increase in demand for oil in the past five years, Smith said.
Hicks and Smith also have investments in Petroleo Brasileiro SA and PetroChina Co. Ltd. Almost half of the fund's assets are in shares of companies based outside the U.S.
Shares of Rio de Janeiro-based Petrobras rose more than eightfold in the past five years after currency adjustments. PetroChina's stock climbed more than 55 percent in the past 12 months. Beijing-based PetroChina gives Hicks and Smith access to a wider part of the global market.
"Because they're Chinese, they're not as averse to operating, say, in Sudan or other troubled spots in the world," Hicks said.
