Resources still robust

At first glance, now seems an odd time to be recommending a commodity fund. After a glorious bull run, commodity prices fell sharply in the second half of 2008, taking mining and oil and gas stocks with them. A recovery rally in the past few months is now running out of steam.

But few dispute the long-term attractions of commodities, with a growing world population absorbing a finite supply of resources. The First State Global Resources Fund is positioned to take advantage of this long term growth story, but its defensive bent also makes it less vulnerable to short-term corrections such as the one that commodity stocks are currently experiencing.

For Meera Patel, senior analyst at Hargreaves Lansdown, the fund's defensive approach compared to other funds in this space is a key attraction. "While this means that it might get left behind in a strong rally, we would expect the fund to outperform when the sector is volatile or falling in value.

"The focus is very much on companies with strong balance sheets and earnings resilience and in a difficult environment this strategy has proven to deliver. We believe the long term outlook for the fund is promising."

The fund, which was launched for UK and European investors in October 2003, following on the success of the flagship fund in Australia, was not immune to last year's market fall-out but has managed an impressive recovery delivering performance over the last six months, way past the 30 per cent mark.

It invests in a diversified portfolio of companies exposed to the global resources as well as players in energy sectors in various regions of the world. While holdings range from large capitalized to small capitalized, the fund limits its exposure to small companies to a maximum of 10 per cent.

The fund has been managed by Sydney-based Joanne Warner since 2006. She is joined by David Whitten, head of global resources at First State, who leads a team of five portfolio managers and two analysts.

Andy Parsons, advice team manager at retail stockbroker, The Share Centre, applauds Ms Warner’s heavy emphasis on site visits - since the fund's launch, 11 years ago - she and her team have made 750 visits to mining and energy companies in over 50 countries spending a large amount of time on site visits. "Getting on site and looking at a company's key assets, its infrastructure and the geology of the deposit, is very different from sitting in the boardroom," he says.

Mr Parsons also favours the fund's rigid investment selection guidelines, which dictate that three out a possible five criteria has to be met before an investment is made. These requirements include an earnings per share (EPS) growth greater than 5 per cent, a net debt to equity ratio below 50 per cent, low production costs and strong financial management.

While the team continues to monitor small cap companies, the funds remains skewed to large caps with a significant amount invested in large diversified miners. "We favour the size, quality, and relative valuations of Vale, BHP Billiton and Rio Tinto which are exposed to a wide variety of commodities," says David Whitten of First State.

Given that this is a sector based fund, with a high exposure to overseas markets, it should ideally not make up a large proportion of an investor's portfolio. That said, if the so-called 'Beast of the East' - China - and the rest of the emerging world's appetite for resources continue unabated - this fund should remain a sound long term play.

Key fund data:

You can download a factsheet (PDF) about this fund here.

Source:

Top ten holdings:

Geographical breakdown: