Inflation has hit its highest level in two years, rising to 1.2 per cent in November from 0.9 per cent in October. And with the fall in sterling making imports more expensive, coupled with a rise in the oil price, inflation is expected to rise further in 2017.
- Inflation hedge
- Good performance
- Experienced manager
- Ability to short
- Derivatives may increase risk
- Commodities rally may reverse
However, some of the assets investors traditionally use to hedge against inflation are looking expensive. "Inflation-linked bonds have responded and priced in much of the inflation expectations," explains Adrian Lowcock, investment director at Architas. "Many companies in the equity income space offer inflation protection with the ability to raise prices, however the sector attracted a lot of money from investors looking for income as bond yields fell, driving up valuations in certain areas."
But another way to hedge against inflation could be to add some commodities exposure to your portfolio via a fund such as Investec Enhanced Natural Resources (GB00B2QVX896). Commodities and inflation are correlated because rises in commodity prices drive inflation higher. And although commodities prices have recovered from their lows at the start of this year, renewed interest in fiscal stimulus and infrastructure spending by western governments, notably the US, could mean the rally is set to continue.
This fund invests around the world primarily in the shares of companies that are expected to benefit from an increase in the prices of commodities and natural resources. This includes companies involved in mining, extracting, producing, processing, transporting or other activity relating to commodities and natural resources.
The fund's managers, George Cheveley and Tom Nelson, are also able to use derivatives to take long and short positions on company shares. For example, the managers have recently initiated short positions (taken a bet on the share price falling) in United States Steel Corp (X:NYQ), citing a poor outlook for US steel prices and in European peer Kloeckner & Co SE (0KVR), which is on low earnings growth.
"An unusual feature of this fund is that it can make money from price falls as well as rising prices by using derivatives," says Mr Lowcock. "These are used mainly to manage risk, reduce volatility or benefit where they have a negative view."
The fund has delivered solid outperformance over one and three years, generating 67.1 per cent and 25.2 per cent respectively, compared with 51.2 per cent and 21 per cent for MSCI ACWI/Natural Resources Index.
Mr Cheveley, who has run the fund since its launch in 2008, is highly experienced. He has over 20 years experience in the investment industry and specialises in metals and mining. He has worked at Investec since 2007, before which he was a market analyst at mining company BHP Billiton (BLT) for three years. According to FE Trustnet data, Mr Cheveley has demonstrated sustained stockpicking skill and an ability to beat the market over the long term, delivering a cumulative total return of 21.1 per cent over seven years, compared with -6.6 per cent for a composite of his peer group.
Although the ability to take short positions increases the fund's flexibility, there is also the risk the managers will make the wrong call on these. The fund also did not beat MSCI ACWI/Natural Resources index over five years, and there is a risk that the commodities rally will not continue or might go into reverse, due to factors such as a further slowdown in China.
But its managers have proved their ability to allocate away from or short less attractive areas. So for investors with a higher risk appetite who are looking for long-term growth, Investec Enhanced Natural Resources still looks like a good opportunity. Buy. EA.
| Investec Enhanced Natural Resources Fund (GB00B2QVX896) | |||
|---|---|---|---|
| Price | 133.99p | 3-yr mean return | 6.74% |
| IA Sector | Specialist | 3-yr Sharpe ratio | 0.38 |
| Fund Type | Open-ended investment company | 3-yr standard deviation | 16.04% |
| Market Cap | £103.47m | Yield | 0.01% |
| No of Holdings | 67 | Ongoing Charge | 0.92% |
| Set-up date | 01/05/2008 | More details | http://www.investecassetmanagement.com/united-kingdom/professional-investor/en/fund/31 |
| Manager start date | 01/05/2008 | ||
Source: Morningstar, as at 13/12/16
Performance
| 1-year total return (%) | 3-year cumulative total return (%) | 5-year cumulative total return (%) | |
|---|---|---|---|
| Investec Enhanced Natural Resources | 67.1 | 25.2 | 13.7 |
| MSCI ACWI/Natural Resources NR USD index | 51.2 | 21.0 | 25.8 |
Source: Morningstar, as at 13/12/16
Top 10 holdings as at 31/10/16 (%)
| BHP Billiton | 4.5 |
| Chevron | 4.1 |
| Glencore | 3.7 |
| BP | 3.4 |
| CF Industries | 3.4 |
| Marine Harvest | 3.1 |
| EOG Resources | 3.1 |
| Suncor Energy | 2.9 |
| Total Oil | 2.9 |
| Leroy Seafood | 2.9 |
Source: Investec Asset Management
Sector breakdown, as at 31/10/16 (%)
| Sector | Long | Short | Net |
|---|---|---|---|
| Exploration & Production | 22.9 | 0 | 22.9 |
| Diversified Mining | 15.1 | 0 | 15.1 |
| Integrated Oil & Gas | 13.4 | 0 | 13.4 |
| Protein | 10.8 | 0 | 10.8 |
| Oilfield Services | 4.4 | -3.3 | 1.1 |
| Gold | 7.2 | 0 | 7.2 |
| Fertiliser | 4.1 | -1.8 | 2.3 |
| Nickel | 5.3 | 0 | 5.3 |
| Steel | 3.0 | -1.0 | 2.0 |
| Copper | 3.5 | 0 | 3.5 |
| Zinc | 0.5 | -0.9 | -0.4 |
| Diversified Resources | 1.3 | 0 | 1.3 |
| Plantation | 1.2 | 0 | 1.2 |
| Aluminium | 0 | -1.0 | -1.0 |
| Process/Trade | 1.0 | 0 | 1.0 |
| Mineral Sands | 1.0 | 0 | 1.0 |
| Rare Earths | 1.0 | 0 | 1.0 |
| Silver | 0.9 | 0 | 0.9 |
| Platinum | 0.8 | 0 | 0.8 |
| Coal | 0.6 | 0 | 0.6 |
Source: Investec Asset Management
IC Tip Rating
| Tip style | Growth |
|---|---|
| Risk rating | High |
| Timescale | Long term |
