Investec's commodity picks: copper, oil and gold

Bradley George and George Cheveley, managers of the Investec Enhanced Natural Resources fund, aim to capture commodity price rises while limiting exposure to what can be vicious downward swings.

Commodity demand remains 'upward sloping'

Investec Enhanced Natural Resources fund manager Bradley George and co-manager George Cheveley believe commodities remain in a long-term upwards trend despite recent volatility and a global slowdown.

George said that despite the huge fall in demand for commodities in 2008, since the start of 2000 demand for commodities has remained largely on the up: ‘There is a long-term upwards trend in demand, but it won’t be a one-way bet as demand is circular. It almost evaporated in 2008 for credit reasons before re-accelerating in 2009 and 2010. It slowed last year but overall demand remains upward sloping.’

The fund, which is a pick of Citywire Selection, aims to capture between 70% and 80% of the potential upside of commodity price rises while limiting around 50% of the downside. The approach has seen the fund post a positive return of almost 15% since launch in May 2008, beating its sector rivals over the period.

Oil demand to rise as supply tightens

At the start of the year, the fund had net exposure to the metals and mining sector of 69%. Within that, precious metals made up 19% while industrials, agriculture and soft commodities made up 15% and 13% respectively. The biggest weighting was to energy stocks, however, due to the pair’s belief that crude oil will stay at elevated levels around the $100 per barrel mark over the course of 2012.

‘We think the crude oil market is very tight and that demand is continuing to grow,’ George said. He expects China’s oil demand to rise by 7% a year and he points out that despite its problems, European demand was flat in 2011, while US demand grew by 2%.

Overall he expects to see global demand for oil grow by between 1.5% and 2% this year. ‘As China grows, the percentage of demand grows and we don’t see crude oil demand slowing significantly. Supply is also struggling and any further shocks would exacerbate the problem.’

He stresses that spare global capacity stands at 2.7%, and that oil cartel Opec can only increase capacity marginally. ‘We expect around $100 per barrel in 2012, which is just 10% downside from where we are now.’

Integrated oil firms face 'rerating'

George also points to the fact that shares in many big integrated oil firms fell in 2011. ‘The commodity was up 13% but energy equities were down 2%, so there is significant divergence here. We expect 40% to 50% upside within integrated oils.’

In terms of companies, he tips French Total and Italian peer ENI to head higher, along with Brazilian state-run giant Petrobras. The groups have lagged their US rivals Exxon and Chevron over the past year, but George believes they have similar growth profiles. ‘If we assume that Europe does not collapse, Total sells to markets there, as well as in Asia, Europe and the US, so it has significantly underperformed the commodity itself,’ he said.

'Marginally' bullish on gold

The pair also remain ‘marginally bullish’ on the gold price, expecting it to average $1,675 in 2012 and $1,730 in 2013 albeit with quite high levels of volatility. The gold weighting has been topped up on a view that gold shares will close in on the better performing gold spot price over the next few months.

The fund’s top holding is Australian miner Newcrest at 4% of the fund, and a physical gold ETC is its third biggest holding at 3%. George also holds US firm Royalty Gold as a 2.7% stake. ‘We think gold shares are oversold and that Newcrest will do well in 2012.’