Go with the flow
Published in Money Magazine, July 2010
By Peter Freeman
Money shows you how to take an exposure to the world's resource boom
The proposal from the government for a resource super profits tax, if implemented in its current form, will hit some ruining stocks hard. Despite this China's huge growth means the world's resource rich countries are enjoying yet another mining and energy boom, a development that is likely to continue to underpin the value of most resource stocks, especially those with diversified global investments.
"If you didn't have a significant exposure to resources companies during the 2003 to 2007 boom you missed out on the chance to reap big gains," says Dale Gillham, chief analyst with boutique investment firm Wealth Within.
While some will prefer to invest directly, Gillham says another option is to invest in managed funds that specialise in resources stocks.
"Once you move beyond the major resources companies it can be hard to get access to good research on which to base your investment decisions," he says.
"There is also the fact that the market in a lot of the small resources companies is very illiquid, which makes profitable buying and selling more challenging."
In Australia at present there are four unlisted resources funds open to direct retail investors, two stock exchange-listed investment companies that focus heavily on resource investing, and the recently listed Aii S&P/ASX 200 Resources exchange-traded fund (ETF).
As discussed below, a number of these funds invest globally and so are less exposed to the proposed resources tax.
The perpetual Global Resources Fund, which was launched in late 2008, is not available to direct investors but rather is offered as part of the investment platform, Perpetual Wealth Focus Investment Advantage. The fund currently has just $230,000 invested.
The four unlisted resources funds open directly to investors are the Aviva Investors Australian Resources, Colonial First State Global Resources, Emerging Resources Company Share Fund and Goldman Sachs JBWere Resources Fund.
While the Emerging Resources and Aviva funds were launched in the past four years, the Colonial First State and Goldman Sachs JBWere funds have long track records, with the later being launched in November 1994 and the former in June 1997.
Ron Hodges, director of discount investment group InvestSmart, says mainstream investors are likely to favour the two long-established funds, if only because they have a demonstrated ability to ride out tough times – and with resource stocks there are plenty.
The key feature that distinguishes these two funds is the fact the Colonial fund invests in both global and local resource stocks whereas the Goldman Sachs JBWere fund sticks to local stocks.
Justine Gorman, funds analyst with Standard & Poor's Australia, says one of the main drawbacks of the second approach is the fact BHP's dominant market position means it is likely to account for around 45% of any Australian resources fund's investments.
This, Gorman points out, is not an issue with the Colonial fund since it diversifies across the globe. "While this entails taking on some exchange-rate risk, it provides much more diversification than a fund that sticks with local stocks," she adds.
Another positive is the fact it is less exposed to the impact of the proposed resource tax.
Stephen Halmarick, head of investment markets research with Colonial First State Global Asset Management, argues that a global resources fund is the best way to move beyond the usual exposure provided by a mainstream Australian equities fund.
"Although an Australian equities fund will contain some exposure to resources, the opportunity for stock picking is small compared with that of a specialised resources fund that invests globally;” he says.
Of the other retail resources funds, the Aviva Investors Australian Resources Fund has done well in its short life.
Owned by the world's fifth-largest insurance group, British-based Aviva, Aviva Investors' Australian operations resulted from the rebranding of its local funds management subsidiary Portfolio Partners.
The most aggressive investment stance of the four unlisted resources funds is that adopted by the Emerging Resources Company Share Fund. Managed by Officium Capital, it focuses on investing in smaller resources companies it believes will be able to achieve strong organic growth within two to three years and then convert this into a rising share price in the medium term.
Two other actively managed resources funds that may appeal to those who prefer stock exchange-listed investments are Global Mining Investments (ASX code (GMl) and Global Resources Master Fund Ltd (ASX code (GRF), both of which are classified as listed investment companies.
The former invests in the shares of metal and mining companies both in Australia and globally while the latter, run by Dixon Advisory & Superannuation Services, operates as a type of fund-of-funds, since it invests mainly in global resources funds rather than directly in shares.
The final mainstream alternative for those who want to invest in a resources fund is the Aii S&P/ASX 200 Resources exchange-traded fund. Listed in late March by Australian Index Investments, a subsidiary of local mortgage and property financing group Eurofinance, the fund is a passive investor that attempts to track the S&P/ASX 200 Index.
As with actively managed resources funds, this means it has a heavy weighting to BHP and Rio Tinto, its main appeal being its low annual fee of just 0.43%.
The author has an indirect interest in BHP BiIliton and Global Mining Investments.
