Volatile miners will firm this year: commodities and resources Tim Blue From: The Australian February 03, 2010 12:00AM
STEPHEN Bartrop expects some volatility in commodity and resource markets in the months ahead, but is confident of a return to robustness later in the year. "It's the message we have been getting from the big miners," he says, "and I see no real reason to doubt it."
As managing director of the Sydney-based resources fund Lime Street Capital Australian Resources High-Alpha Fund, he is confident of more rises to come in a range of mining stocks captured in the fund.
The fund has just reported a gain of 125 per cent in the year to the end of December. The fund is part of the Breakaway Investment Group, which includes the resources research and advisory house Stock Resource.
The minimum direct investment is $25,000 but exposure to the fund is also available through investment platforms.
The interesting side to Lime Street Capital is that its portfolio specifically excludes BHP Billiton and Rio Tinto, not because of any lack of faith in those companies, but because they do not offer the degree of leverage to be found among other producers and explorers. The two global majors are not expensive in Bartrop's opinion, and nor have they been oversold, but they need big discoveries to achieve sharp price gains.
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"Everyone -- fund managers, investors, mums and dads -- can have a view on BHP or Rio but they, especially the small investors, feel less comfortable playing at the lower end of the market," Bartrop says.
"There's an element of hesitation to go outside of those two, but there are good returns to be had elsewhere."
Why set up your own fund?
We set up in July 2008 just before the onset of the global financial crisis, largely because we continually had requests from members of Stock Resource to provide funds management expertise so they and others interested in resources could sit back rather than actively manage their portfolio on a week-by-week basis.
What are your funds under management?
We have between $1 million and $2m, but we are growing. We aim to build the fund to about $50m in the relatively near future.
How would you describe the fund?
Active and high-conviction. In the resource sector it is absolutely critical to look at both a top-down and bottom-up approach and frequent portfolio monitoring.
It is also essential to have a flexible mandate that can hold any amount of cash; in the past we have seen many fund managers forced to invest new fund inflow at the top of the market when they know the market has a high risk of falling in the short term.
What are your fees?
Our management expense ratio is 1.5 per cent, with a 20 per cent performance fee of any gains above a 3 per cent hurdle rate above the S & P/ASX Small Cap Resources Index. So the fund has to earn 4.5 per cent above the benchmark before a performance fee is payable. Past underperformance has to be recouped first and performance fees are not extracted if the performance is negative but still outperforming a more negative benchmark.
What do you see as the main themes that will dominate the market in the next 12 months?
The main themes will continue to be the industrialisation of China and other emerging economies and the sourcing of raw materials for this process.
Where do you see the market heading in the next 12 months?
After a volatile first half where there is confusion over re-stocking, asset inflation and real demand v speculative demand, we expect the US and the Western world to present more confident growth prospects in the second half of the calendar year 2010. At the moment there are contrasting views between anecdotal evidence from people, economic data and investment banking hype.
How do you value companies?
While looking at traditional valuations methods (price to earnings, price to cash flow, net present value), it is very important to understand the potential of new projects and the expansion capabilities of existing projects. Companies with these projects provide the best investment with a combination of growth and leverage to the demand from China and other emerging economies.
Are you increasing or decreasing your cash position?
Temporarily increasing, as we are careful about the quality of our investments and timing of entry is important but circumstances change quickly.
Is this climate good for your type of fund?
Yes, because the long-term fundamentals of industrial demand remain in place. We are likely experience another resources bull market when the Western world picks up and China resumes its export growth, which will be parallel to its own domestic demand.
What has your performance been like since inception?
We experienced theglobal financial crisis with returns largely recovered. On three, six and 12-month returns we are in the top half-dozen funds.
In Australia, what sectors and stocks do you like most?
Iron ore and coal but this will change as we approach the bulk price negotiations.
How important is a company's management?
Very. We see companies with some fabulous projects coming through, but you need to apply a technical appraisal of them in addition to the financial aspects. For example we have Sundance Resources in our portfolio, which has a very large iron-ore project in Cameroon. An investor has to look at the technical merits of the project and the capacity of management to deliver, and gain funding for it. There's a bunch of issues to be settled to ensure that any company can deliver on its promise.
What stocks have been the best performers for you so far?
There have been quite a number but some good performers including Equinox, Perilya and Whitehaven Coal. We have a holding in Clean Global Energy but this is a longer-term play involving a large change in the supply of energy. So we expect multiple returns but the timing is uncertain.
Various stocks have taken a beating in recent months. Has that enticed you to buy up?
No, as we are careful to minimise the risk profile of the portfolio.
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