Jake Moeller reviews highlights of a meeting with Duncan Goodwin, fund manager and Simon Jagger, U.K. head of wholesale distribution, Baring Asset Management, on May 9, 2016.
Resources and related stocks are probably not the easiest sell in the current environment. According to Thomson Reuters Lipper data, the 300 or so retail commodity-, metals-, and energy-themed funds registered for sale in the U.K. have collected only £350 million of net inflows in the six months to April 29, 2016.
This, however, doesn’t appear to be too much of a concern for Duncan Goodwin, the fund manager of Baring Global Resources Fund. “There's been a lot of soul searching as to what the investment case is for resources,” states Mr. Goodwin. “We have constructed a fund that offers investors the potential for superior returns in world equity markets, irrespective of global commodity prices.”
A new take on the super cycle
It’s a theme Mr. Goodwin returns to regularly. This fund has been redesigned over his two-and-a-half-year stewardship and is no longer a pure play on the resources sector. “It’s fair to say the ‘super cycle’ has dissipated,” states Mr. Goodwin. “The reality is we're not going to return to the degree of industrial revolution in China or in India that we saw in the late 1990s.”
Consequently, he has implemented three distinct investment categories that reflect his team’s view on the way the resources cycle has developed, eliminating the reliance on global demand for resources:
- Commodity resources–traditional primary mining, agricultural, and energy businesses; currently 37% of the fund.
- Consumer resources–secondary exposure to resources, including solvents, refining, packaging, and fragrances; currently 40% of the fund.
- Next generation resources–“downstream” exposure to resources, including sustainable solutions, renewable energy, lithium and battery storage, and health; currently 22% of the fund.
Duncan Goodwin, fund manager, Baring Asset Management.
The fund is fully flexible as to how it allocates to these three buckets, although the team resources are allocated equally among them. “There is a creative tension between these three strands,” Mr. Goodwin states, “and in many instances they are a natural hedge for each other.”
This fund can be classified as a quality GARP (growth at a reasonable price)-type fund, with all stocks screened in accordance with Baring’s established bottom-up process. The fund focuses on companies with a compound annual growth rate of 10%-20% over a three-to-five-year horizon and that offer a 25% upside to fair value.
There is considerable emphasis on quality of management and company visits. “Executives need to recognize the requirement to generate returns above the cost of capital and to generate cash to fund capex,” states Mr. Goodwin. “This very simple principle is often missed by many managers–especially in commodities.”
There is also a thematic element to the fund, especially in respect to the Next Generation category, with a proportion of the six-person team dedicated to investigating potential trends in resources-associated industries.
This fund is typically a high-conviction portfolio of 30-50 stocks and targets an active share of 70%. The fund is benchmark agnostic with a stated focus on absolute return, but it cites a composite benchmark of 60% MSCI ACWI/Energy and 40% MSCI ACWI/ Materials.
Figure 1. Performance of Baring Global Resources Fund Vs. peer groups and benchmarks (in GBP from Mr Goodwin's tenure to April 30, 2016)
Source: Thomson Reuters Lipper. Lipper for Investment Management
Like-for-like sector comparison is not straightforward. Despite its name, the fund doesn’t sit comfortably in a commodity-, energy-, or mining-classification scheme. Reflecting the flexibility of its mandate and its ability to invest globally, it is currently classified in the IA Specialist sector, and at Lipper it is classified in the Global equity sector. Fund selectors who seek meaningful peer group comparisons would likely have to create their own list of relevant peers.
The largest holding in the portfolio is based around the recent lithium theme articulated by Barings. Albemarle is a mining company with a third of its business built around the lithium market. It has been a holding for six months and was nearly 4% of the portfolio at the end of March 2016. “Companies such as Tesla are suddenly becoming mainstream,” states Mr. Goodwin. “The amount of lithium required for an electric car battery is 9,000 times that of an iPhone. This is a new type of resources ‘super-cycle’ driven by the consumer.”
Figure 2. Twelve-Month Share Price of Albemarle Corp to May 11, 2016
Source: Thomson Reuters Eikon.
Traditional resource holdings in the portfolio are characterized by prudent management, capex and cash generation, and the ability to adapt into the Barings themes. They include Rangold Resources, Galp Energia, and Rio Tinto.
Mr. Goodwin acknowledges the headwinds facing resources generally, but he is “gently” optimistic. “We think investors have become too bearish on emerging market growth,” he states. “We don’t see a huge growth surprise, but there are companies looking very sound.” With respect to China, he sits in the soft-landing camp, but he keenly highlights the durability of some of the derivative-resources themes. “We’re optimistic in consumer trends in EM–e.g., paint and cement demand in India or Chinese healthcare growth.”
The fund is most recently researching potential increases in positions in oil services. “We see evidence that the oil market will start to balance in the second half of 2016,” Mr. Goodwin states, “and we see some opportunities in selective integrated oil majors.”
During Mr. Goodwin’s stewardship the fund has returned a negative 10.3% (in GBP) to the end of April 2016. It has beaten its composite benchmark over this period (+1.9%) (see Figure 3. below) but remains in negative territory against broader benchmarks and sector classifications. However, it has held up well against some of its more commodity-laden peers and should be looked at in this context.
Figure 3. Three year risk/ return of Baring Global Resources Fund Vs. selected peers and benchmarks (in GBP to April 30, 2016)
Source: Thomson Reuters Lipper. Lipper for Investment Management.
Mr. Goodwin appears genuinely excited about the way the fund is now structured and the flexibility his team has to manoeuvre around the vagaries of the raw-commodity cycle. His story is certainly interesting, and the success for example of the recently incorporated lithium theme into the portfolio appears to have rewarded the effort of producing the various white papers prior to its implementation.
For investors who are worried about the durability of the commodity super-cycle, this fund structure would offer a neatly packaged alternative. Furthermore, Baring has a strong pedigree of specialist resources and commodities investing. However, with the recent finalisation of this fund structure, it is fair to say Baring Global Resources Fund has only been completely moulded into the image its manager intends.
Following on from the restructuring Mr. Goodwin initiated at the start of his tenure, he will want to be well bedded in for his upcoming three-year anniversary.