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Forces of nature

Ihave to admit that I am not usually a fan of highly specialised funds. By their nature, they are significantly more volatile than general funds and quite often unsuitable for anyone but very sophisticated clients. That said, they do offer opportunities if you get your timing right.

One fund that certainly fits this description is the Australian natural resources fund run by Oceanic Asset Management. The fund (as you might guess) buys into Australian natural resources. The thought of this might send you running to the hills. After all, why invest in such a narrow fund when the likes of First State and JPM offer broader funds?

That is true to an extent but this fund does give you exposure to medium-size and smaller companies in Australia which would clearly benefit from a resources boom over the coming decades.

The fund is run from of Perth by Elliott Rowton and Stuart Bell. Both have many years experience in Australian equities and, as such, I feel comfortable with the fund.

I like their realistic approach. They are not blind commodity bulls and realise that there are going to be plenty of corrections along the way. They keep an eye on the macro picture while looking at the bottom-up opportunities that the Australian market offers.

In the 1980s, there were a number of Australian funds but they came to a natural end, perhaps because the Australian market was not mature enough at that time. That is not the case today. This is a highly regulated market with a strong economy and strong labour markets. Huge amounts of domestic cash have been invested by pension schemes and there are tax incentives for further investment.

Australia is extremely rich in natural resources and has a lot of expertise in this area. It is strange that many Australian shares trade at a discount to their US, Canadian and European peers.

The team believe that many of the companies they hold are potential takeover targets, not only from the developed world but from the Chinese and Russian markets too. These Australian companies are effectively leveraged plays into the Asian markets from a stable political and capital base. It is an interesting way of playing the secular growth story in Asia. The fund has around 40 to 50 stocks, with highconviction stocks having the biggest position at an initial 4 to 5 per cent of the portfolio, which will be trimmed back at around 9 per cent.

Uranium – one of the hot commodities right now – has had a very strong run and both stocks that this trust held have already been bid targets.

The Australian “threemine” policy means that uranium mining has been held back but there is a big debate going on in Australia which may well open up the mining of this metal. Meanwhile, precious metals such as platinum are a huge play on global warming as platinum is used in catalytic converters. With new EU legislation coming, platinum will become more in demand.

The team still feel that valuations are cheap on a free cashflow basis, with huge amounts of cash on balance sheets, increasing dividends and the potential for more takeovers.

The fund size is £32m and is likely to be soft closed at around £60m to ensure there are no liquidity problems in buying the stocks they want in Australia.

When I met the team, they expected some pull back and I suspect that the recent stockmarket fluctuations have been exactly that. In fact, the team had around 10 per cent in cash for just such an eventuality.

I realise that this fund does not have mass appeal but it should not be ignored. I notice that some fund of fund managers have picked it up, which is always an interesting indicator. For bigger client portfolios, this fund could be worth 2 to 3 per cent of asset allocation.

Mark Dampier is head of research at Hargreaves Lansdown.


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