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Commodities headed for a fall, says Noble-Nesbitt
Deryck Noble-Nesbitt, Citywire A-rated smaller companies manager at Close Brothers, says he is avoiding commodity stocks and looking to cash-rich AIM companies.
China’s economic growth is slowing and government plans to sustain development though consumer spending are underway. However, the revision of the country’s path to success, away from the infrastructure boom and export market, could come at the cost of global commodity stocks.
Noble-Nesbitt explains: ‘China is the marginal driver of demand for things like copper over the last 10 years but when it recovers, if it does recover, they’ve got a stated intention of trying to make the economy more of a domestic demand lead services economy rather than building, building, building and that to me isn’t a particularly good back drop for copper.’
‘I had 40% about three-and-a-half years ago in mining but I have now got about 4% in mining now. I’ve done that on purpose as I think a lot of commodities, especially base industrials metals, like copper, are overpriced and are heading for a fall.’
Both of the funds Noble-Nesbitt oversees invest in shares on the Alternative Investment Market (AIM). The Special Situations fund returned 157% to outperform the Numis Smaller Companies plusAIM (-InvTrust) total returns of 108.7% and the Beacon fund returned 152% over the past three years compared to the benchmark FTSE AIM total returns of 98.3%.
However, Noble-Nesbitt is also avoiding oil and gas, which makes up 40% of AIM and had a good start to the year. The lack of investment in the sector impacted the portfolios to knock them off their perch as the top performing UK Smaller Companies funds over the past three years.
Noble-Nesbitt explains how the Special Situations fund has lost 10% in the past three months in a rising market: ‘I basically bought domestic UK coal companies because they were all selling coal over the last five years on long-term contracts, whereas the spot market was much higher so the premise goes that when the contracts end they re-price at a much higher value and the profits of the business explode but that hasn’t happened.
‘They’ve completely missed out on the bull market and they’ve had massive production issues. But would I do it again? Yes I would as I did it with a company that used to be called Titanium Resources and is now called Sierra Rutile (SRX.L) and that worked really well. I would do it and I like those stories, it’s just with that one the production issues have been insurmountable’, he says.
High conviction in Tanfield
Electric vehicle manufacturer Tanfield (TAN.L) is the top holding in both portfolios, making up 7% of the Beacon and 8.4% of the Special Situations fund. Its shares tumbled 80% in 2008 after major profit warnings due to slower sales, prompting an investigation by the London Stock Exchange’s regulatory team. Noble-Nesbitt bought the shares in stages, starting in August 2010 at an average price of 14p when he was convinced by the company’s potential in the electric vehicle market.
He says: ‘The electrical vehicles business was trying to break into the US and came under pressure trading wise with profit warnings and needed to raise money. A lot of the big holders just sold out completely in rage and I just thought that created an interesting opportunity.’
He is also looking to Israeli software company Emblaze (EBLZ.L) and Finnish cardboard producer Powerflute (POWR.L). He continues, ‘I quite like Powerflute, they’ve got one plant that makes corrugated cardboard and they made a disposal last year and now they’ve got net cash on the balance sheet.’
Both of the funds invest in AIM and although the market has provided great returns for Noble-Nesbitt, he admits it can have its shortcomings.
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