Resources will rock

There is a new wind blowing and it’s going in the direction of commodities. After years of lackluster performance living in the shadows of at first financial stocks and then technology stocks, the natural resource funds are demanding notice. And with April’s results it’s hard not to pay attention.

Roger Mortimer works with Derek Webb in San Francisco to manage the AIM Global Natural Resources fund. Roger worked with GT Global since 1997 before they were acquired by AIM a year later, and before that was managing equities for Global Strategy. His primary focus is equities, and he is better known for leading the AIM Canada Value Class fund.

The universe for natural resource funds in Canada tends to be quite disparate, according to Roger. "Many funds are invested in different resource areas," he says. "Some have a mining bias, some have an energy bias, some attempt to adjust across a wide range of commodity areas." He sees the AIM Global Natural Resources fund as a hedge, in essence, against more traditional equity products, changes in interest rates, etc. And he has a unique approach for his fund.

"The resource area fits more naturally with my value investment style," he says. Roger uses a combination of top-down and bottom-up investment approaches that distinguishes the fund from most of its peers. Geographic allocation is not as important as the underlying commodities. "The most significant variable is which commodities the fund is exposed to at any given time," he says. To that end, Roger first identifies the commodities sectors that offer the best risk/return combination based on attractive fundamentals, and then picks the stocks that represent the best value.

Since commodity stocks are driven by commodity prices, the timing has to be right. "It’s a function of supply and demand," he says, "and we want to have the wind at our back." When he knows which commodities he wants to be exposed to, it comes down to good stock-picking. "We own more than a single stock in any particular area," he says. He may own a cheaply priced stock for the value, plus another stock which is not hedged against the underlying commodity price and can benefit from rising commodity prices. This strategy also helps mitigate risk, according to Roger. "These companies have a fair amount of stock-specific risk," he says, "more than other industries because of the potential for business disruption, like a mine collapse for example. I don’t want to put all my eggs in one basket."

"Generally, I would say that right now we’re in a bullish commodity environment," Roger says. The Commodity Research Bureau hit a 20 year low last March after industrial demand fell in the aftermath of the Asian and Russian economic crises, and global inventories rose. Since then, global growth has increased demand and hastened the depletion of inventories. "The markets have tightened," he says. "The energy area in particular is looking very attractive."

Roger expects that investors will once again start embracing resource stocks and more money will flow into the sector. He also looks forward to the day when alternative power sources like electric fuel cells will be commercially viable and widespread. Some people have the impression that alternative power will destroy the giant energy companies of today, like it threatens to do with the internal combustion engine. Roger believes that alternative power companies like Ballard Power Systems will have an important role to play and they will not destroy the system. "The large integrated energy companies will be partners in these new ventures," he says, citing Texaco as an example, a company that wants to be exposed to this new area. "Otherwise they face a threat of competition." Almost by definition, the companies dealing with cleaner, alternative sources of power will be commodity companies and will work themselves into this fund, he adds. Fuel cells could be the most popular commodity traded on the commodity exchanges of the future.

Levi Folk, Richard Webb and Peter Diplaros are Investment.com mutual fund specialists and editors of the Fund Counsel newsletter. They can be reached by e-mail at peterd@hqinvestment.com.