Escalated tension between the US and Iraq and labour strike in Venezula pushed prices of gold and oil up to new heights unseen for years. In 2002, while gold price rose above USD300 per oz, oil price cost more than USD30 per barrel and the price of natural gas doubled. Many funds that invest primarily in firms exploring these natural resources, as a result, recovered much of their losses in 2002. In particular, gold and precious metals funds outstripped all equity peers to deliver glittering returns. Nevertheless, only 6 out of the 10 natural resources funds managed to attain positive growth (see table below).
MLIIF World Gold fund gained 100% in 2002, topping the performance chart of all funds in the Hong Kong universe. Its focus on gold mining companies that had not hedged for gold price fluctuations was the key driver for portfolio returns; industry consolidation also benefited the performance of some of its holdings. Due to the capital-intensive nature of the exploration projects, fund manager Evy Hambro emphasizes on a firm's cashflow position in his stock selection. While neither Hambro nor any of the fund's holdings hedged for gold price changes, Hambro typically tempers portfolio risks by investing in firms that explore other natural resources and spreading assets in many countries to minimize political risks.
The MLIIF World Mining fund that Hambro co-manages had gained, as Management also stressed on the gold theme in 2002. Investments in platinum and diamond subsectors also contributed with high double-digit calendar year gains.
Similarly, the Investec GS Global Gold fund took advantage of its holdings' unhedged position against gold price fluctuations, as well as the rekindled market interests in gold investment. Assuming the manager role in May, Daniel Zacks realigned the fund's focus from small caps to large companies in the gold mining sector, so as to keep check of portfolio volatility. He further reduced the fund's cash position to around 10% of assets to augment the fund's benefit from rising gold prices. Besides, Zacks had steered clear from many emerging-market countries since the beginning of the year to focus on countries with major gold mines (e.g. South Africa).
Over the year, the Investec GS Global Energy fund had allocated about half of its portfolio to oil-price-sensitive assets; share prices of energy explorer holdings such as Valero Energy, Precision Drilling and PetroCanada companies had risen by double digits. Fund manager Tim Guinness adopts a value approach to identify companies that he deems undervalued. The portfolio typically has a bias towards medium-sized firms. Despite its sector focus, the fund courts lower volatility than many of its Global Equity peers.
The INVESCO GT Energy fund is a more aggressive choice that has less than two years of history in Hong Kong. Fund manager John Segner had changed the focus of the fund from integrated oil companies to oil explorers in early 2002 which aided the fund's performance. Nevertheless, the fluctuations in oil price had added to the fund's volatility, but Segner's growth investment style opens greater upside potential for the fund, especially during energy stock rally.
Although the funds mentioned above had excellent performance in 2002, their performance is sensitive to changes in the prices of natural resources. With oil price remains unstable and slowing oil demand in the US, oil companies are facing lower refining margin. Meanwhile, gold price has reached new height; to rise further in a deflationary environment will require investors' confidence in gold's ability to preserve value. In all, these funds will be more appropriate for non-core investments, given their sector focuses.
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Table 1. Natural Resources Funds with Positive Gains in 2002
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