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Mark Dampier’s Fund Focus: Junior Oils, Junior Mining

It was in July 2007 that I first mentioned the Junior Oils Trust in this column. It is managed by Angelos Damaskos who is the son in law of the legendary investor Jim Slater. The objective of the fund was to buy into small oil companies which have the potential to grow into giants.

In fact, some of these have done so. Tullow Oil, which is one of the biggest holdings in the fund is in fact a FTSE 100 company now. Many of the fund’s smaller companies have been targets of takeovers, earning the fund a nice profit on its initial investment.

While this is a higher risk strategy, the manager will only buy shares in companies that are cash generative and have proven oil reserves. It is a concentrated portfolio where the top 20 odd stocks will account for nearly 50% of the fund, so the performance of the individual stocks will have a significant impact on the performance of the fund.

Upon re-reading my article from 2007 I was interested to see that in January of that year a barrel of oil cost $49, but when I wrote the article it had hit a new record of $79. Funnily enough a year later it had rocketed up to a peak of $147. Since then it has fallen back to around $70 again, but today I think for investing in oil companies has if anything been reinforced.

Angelos Damaskos thinks that the market has become somewhat over extended in the recent rally and there may well be a setback in the short term. Incidentally that is probably true of most of the world’s stock markets, particularly the emerging markets. Crucially, however, the credit crunch has brought many oil exploration projects to a complete stop. This means that once demand for oil returns we will once again see a mismatch between supply and demand, which is the ideal environment for the price to surge upwards once more. So in my opinion the fund remains attractive for high risk investors, and I would look upon any fall in the next few months as a long term buying opportunity.

Angelos Damaskos is also launching a new fund in September: Junior Mining. This to some degree is similar to the oil fund, except it is looks to buy into the smaller mining companies where the manager feels he can identify the winners of tomorrow. The fund will focus on gold mining shares, with 70% of the portfolio allocated to this sector.

There remains a huge disconnect between the price of physical gold and the price being paid for mining shares. In other words gold mining shares are cheap relative to the gold price. Given the huge economic uncertainty in the world I would not bet against a considerably stronger gold price, especially as many of the world’s currencies don’t look very attractive.

Some 10% of the fund will include other precious metals such as silver and platinum, while a further 10% will go into base metals like copper and iron ore. The final 10% is allocated to uranium shares, an area which surely is going to enjoy a greater resurgence over the next few years as there is an increasing need (whether we like it or not) to build more nuclear power stations.

The fund will be geographically diverse, spreading across Africa, the Far East, Australia and Latin America but will tend to avoid areas such as Russia and the Middle East on the basis of political risk and corporate governance.

The fund is clearly a higher risk and volatile investment. It is not for widows and orphans. Since it is so specialised I suspect you will find it either at the top of the table in terms of performance or at the bottom. I would certainly maintain that a small amount could make an interesting addition to the riskier elements of a diversified portfolio.

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