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Manager focus: Bradley George

Investec Asset Managements Enhanced Natural Resources funds has outperformed its competitors as a result of its short exposure.

Over the past year to May 30, the fund fell 0.71%, while the JPM Natural Resources fell 32.68% and First State Global Resources dropped 33.17%, according to Morningstar.

Bradley George, who manages the fund alongside George Cheveley, says the short book achieved a positive contribution to performance of 10.5% owing to the extreme volatility in the markets.

The fund has the ability to be long and short of the market through equities, and through Exchange Traded Commodities (ETCs). Derivatives may also be used to reduce volatility.

At launch, on May 1, 2008, the funds short exposure was low as commodity markets began to rise. [Bradley] George says net exposure was around 80% in May, but this was down to 20% by August as their views on some of the markets turned negative.

He draws upon the research ideas of a team of specialists, which he says is important as there is so much disparity in performance within the different resources. For example, in base metals, copper has returned 65% so far this year while aluminium posted just a 3% rise, he says.

We use a strong team of specialists in all different areas such as energy, base metals, precious metals, miners, agriculture and soft commodities. The powers of this fund enable us to express our views on each one through equities and ETCs.

Currently the fund has 70% long exposure and 25% short, creating net exposure of 45%. Key themes include positions in gold equities and platinum commodities.

George explains: The gold price is likely to hold up but will not rise dramatically. The costs miners are facing are being reduced dramatically. The operating margin should therefore increase and cash flow generation will be strong. It looks undervalued.

We like platinum because there has been a contraction in supply in South Africa, which produces 80% of the worlds supply. Miners have faced operational difficulties as the auto sector, which uses platinum in catalytic converters, have been savaged and stopped placing orders. But things are stabilising in the auto sector and companies should start to place orders again at a time when supply is constrained.

He also adds that infrastructure projects in the East and even the West will cause a major demand for commodities. Eastern regions have demand for metals for urbanisation projects while government stimulus packages in the West have featured plans to repair and upgrade infrastructure.

George says this may take longer to take an effect as OECD countries tend to be slower than China, and countries are focusing on repairing their financial systems first.

On the short book, positions include aluminium, oil, and oil services. I think the oil price has gone too high too fast and there is a lot of supply waiting to come back to the market. Also, major oil companies wont be spending on projects as they protect balance sheets to pay their dividends, he says.

The managers have also put option baskets on materials and energy indices as downside protection.

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