Global reopening and a sustained lack of investment in new production supporting a new commodities super cycle

Funds Management

by Rachael Jones

Portfolio Managers for the Ausbil Global Resources Fund (ASX:AXW10), Luke Smith and James Stewart talk about their bullish views for base metals and battery materials demand, and the positive macro-outlook as economies globally are slowly returning to normal, which underpins a global supply chain restock and increased demand for commodities.

Rachael Jones: Hello. I'm Rachael Jones for the Finance News Network. Joining me from Ausbil Global Resources Fund are Portfolio Managers Luke Smith and James Stewart. Luke and James, welcome back to FNN.

Luke Smith: Thank you.

James Stewart: Thank you.

Rachael Jones: Now, Luke, the fund is an absolute return fund that takes both long and short positions. Can you tell us more about this?

Luke Smith: Ausbil Global Resources Fund that James and myself run is a long-short approach. We aim to generate absolute returns through the cycle. It's been highly successful with this focus on risk management through the last 12 months, and up until the end of February of this year we generated returns of 87.9 per cent on a net of fees basis.

Rachael Jones: So, Luke, what is the resources super cycle and where are we in the trajectory?

Luke Smith: We think we're at the early stages of the natural resources super cycle. Clearly, stocks have performed very well since COVID, but we can see a range of factors that are going to continue to support the space. Demand is strong, starting with China. Then, as COVID vaccine has its impact and stimulus in the global economy starts to have some traction, we'll see the rest of the world demand be strong into a backdrop that has seen a lack of investment, new supply. So, we think we're at the early stages of a commodities bull cycle and see real opportunities in this space.

Rachael Jones: Thanks, Luke. And over to you, James. What are the themes driving this commodity demand?

James Stewart: Sure. In the short term, it's really a reopening of the global economy, so the world returning to normal after COVID constraints. What we really see on the back of that is a global restock, so strong demand for most commodities. At the same time, we're seeing a lot of stimulus in certain areas. So, for instance, green stimulus, which is really driving demand for some new commodities, for instance, batteries and electric vehicles, driving demand for lithium graphite and other battery materials.

Rachael Jones: And James, could you explain why an absolute return approach is important in resources?

James Stewart: So, resources are a volatile sector, and so our focus is really aimed at protecting capital and making sure we reduce volatility within what is a volatile sector. When we think about absolute returns, we're looking to make money from the long side and the short side, and the fact that we can move our exposure to the market means we can generate returns through rising and falling markets.

Rachael Jones: And, James, are you able to give us any examples?

James Stewart: Sure. At the moment we are positive on copper as a commodity. So, some of our key exposures and contributors last month were Nevada Copper and Hudbay Minerals, which are copper producers. If we think about the opportunity to generate returns in other commodities, gold is one example where we can take a long position in gold or gold producers. That helps us de-risk our exposure in the portfolio, hedging against geopolitical risk and market risk as well.

Luke Smith: And James has given some examples about some of our global exposures, which is a key feature to reinforce. Obviously, we can own the best global companies within any given sector. Energy is an area where we'll have exposures both from a domestic, from an Australian perspective, and an international perspective, so a couple of the key positions that we have within the fund -- Occidental Petroleum has been a big driver of alpha for the fund, and clearly that's a US listed name. And then some of the Australian names, Santos (ASX:STO) is one that we've always had a core position in. We like the name from an Australian perspective – well run company, low on the cost curve, with significant opportunities driving growth within that portfolio. And so it just highlights that within our global construct, we're able to own the best global names within any given commodity.

Rachael Jones: And a topic that's getting a lot of attention on the markets is inflation. Is this a risk for resources?

Luke Smith: Not a risk for resources, it's really an opportunity. What we're seeing at the moment with the move in bond yields and really the implications of growth starting to come back in the system is a lot of question marks about whether or not we're about to see inflation rear its head, and inflation is dangerous for a number of asset classes. Really, one of the only hedges for portfolios are resources, commodities, and gold. There's a high correlation between commodities and inflation, and therefore resources, gold exposure, and a fund like ours provides good protection for portfolios if and when we see inflation rear its head.

Rachael Jones: Thanks, Luke. And the last question to you, James. What are the opportunities, and how are you positioning the fund?

James Stewart: Our key positioning at the moment is long in terms of market exposure, so we're towards the upper limit of our market exposure at the moment. And our key sector exposures are one, battery materials, two, copper, three, energy within our portfolio at the moment.

Luke Smith: So as we've highlighted through this discussion, we see a real opportunity in resources at the moment. To Jimmy's point, we're running the portfolio at our upper end of our net exposure levels. We see a real opportunity within the resources space if it's on the back of strong demand, lack of investment in new supply, currency-related implications, in terms of US dollar weakness. Uncertainty around inflation and the implications that might have for commodities is really driving our thinking in terms of how we're investing in this space. Like we said, it's all about risk management, in this space risk management is core. But, behind it all, we're seeing a real opportunity, and we think this space is setting up well for a multi-year bull cycle within the commodity space.

Rachael Jones: Luke Smith and James Stewart, thanks so much for the update today and congratulations on the fund's strong results.

Luke Smith: Thank you.

James Stewart: Thank you.