Graham French was the M&G fund manager who dumped 12.5 million TAP shares earlier this year ! Interesting article (edited by me) shares some of his investment psychology .......... Fortunately for us, our current M&G holding is NOT managed by Graham ! --–---------------------------------------------------------------------------------------------
M&G’s French: bouncing back from a brutal year M&G’s Graham French has responded to recent losses by refocusing his Global Basics fund further up the economic development curve. But it is his long-term backing of resources and basic materials companies that has been the source of many of his strongest gains, and more recently, his losses.
Since he took over the fund, French has reaped the rewards of a pronounced overweight to this sector with the commodity super cycle in full swing, but since 2008 the fund has had a tougher time, underperforming the benchmark in three of the last five years.
In the period from his joining the fund up until the end of February this year, French remains way ahead of his benchmark, more than doubling the M&G Global Basic Composite’s 132% with an impressive return of 276%. Over five years performance has been harder to come by however, with the fund posting 21.1% compared to the benchmark’s 48.5%.
M&G Global Basics A Inc
Hard times
Last year was a particularly brutal one for French and he described May 2012 as the worst of his investment career. With resources stocks taking a beating, the fund lost 3% of performance in that month alone.
The overweight to basic materials detracted significantly from performance in 2011 and 2012 despite the portfolio’s balance between industrials and consumer goods.
The fund underperformed both its benchmark and the wider equity universe and exposure to gold and Australian miners particularly dented returns.
A contrite French was quick to admit that he may have been in ‘two or three resources stocks that he shouldn’t have been in’. He said: ‘Rightly so, we had to take some criticism last summer as we had not moved up the chain with the commodity cycle coming to an end. We apologise for that blip and have had a good six to nine months since.
‘We exited most commodities but kept some of them and have to accept that last May we had two or three shares we shouldn’t have and it cost us performance. We panicked early and got rid of the problem quickly.’
...but has struggled more recently M&G Global Basics A
French has been reducing his weighting to hard commodities and moving up the economic development chain over the past few months. He accepts that there may no longer be a commodities super cycle but he is not ready to give up on the sector that rewarded him so well completely.
At the end of January 2013 the fund’s weighting to basic materials stood at 28%, down from around 38% five years earlier. In terms of mining companies the drop is starker, down from 28% in January 2005 to just 11% in January 2013, but French retains conviction in selective stocks within the mining sector.
He does not think demand for commodities has fallen off a cliff and remains overweight to Australian miners such as mineral sands miner Iluka Resources and copper producer Oz minerals.
Iluka was the best performer in 2011 but a significant detractor in 2012 – nonetheless it remains a key overweight. French likes the firm as it operates in a niche industry where participants increasingly recognise their position of strength in the market, and he tips it for improved pricing power and higher margins over time.
He insists that most of the issues within the mining industry have been down to poor management and misuse of capital.
‘We are not bearish on commodities as there will still be demand. Everyone was concerned that China was only growing at 7% compared with historic 10% growth but if you have twice the size of economy growing at 8% that is far more powerful than half the size of economy growing at 10% in 2000.
‘The industry overcapitalised itself and up to $200 billion had to be written off due to poor management.’
French stresses that his preferred resources stocks are all cash generative and primarily in relatively scarce commodities or those that face increasing demand. ‘Iluka Resources has zero debt and huge cash flow. It mines for mineral sands where the demand picture is fantastic. We also expect Oz minerals to do quite well this year and don’t want to be in commodity stocks with poor management or where the commodity is abundant.’
Repositioning the portfolio
French has spent much of the past two years gradually transitioning the fund to adapt to the shifting dynamics of the global economy. French says he is moving the fund up the curve of economic development and looking to capitalise on the ever more sophisticated demands of the emerging market consumer.
Where its previous focus was on commodity stocks, around 61% of the fund is now invested in agriculture, food ingredients, consumer goods, logistics and infrastructure stocks. The themes of food procurement and security, as well as agriculture and basic consumer staples, are becoming ever more important and French believes these are all areas which will see a profound uplift in the next economic wave of development in emerging markets.
Key holdings exposed to these themes include consumer goods producer Unilever, ingredients specialists Kerry Group and Symrise, as well as US seed producer Monsanto. French regards these as well managed companies with strong cash generation and the ability to pay meaningful dividends to investors.
Crucially for French, they act as proxies for emerging markets growth, wherever it is derived from and he is confident that after its tough run, the fund has now turned a corner with its heavy exposure to food and agriculture.
Overall, the food themes of flavours, fragrances and ingredients businesses, and the agricultural themes of seed production and potash make up around 70% of the fund when combined with industrials and consumer goods stocks. This compares to around 45% of the fund back in 2005.
TAP Price at posting:
52.5¢ Sentiment: Buy Disclosure: Held
