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JOHCM UK Equity Income
Markets
by Frank Talbot on May 30, 2013 at 11:20
Less is more in mining
Clive Beagles and James Lowen, managers of the £1.8 billion JOHCM UK Equity Income fund, have initiated positions in Glencore and gold miner Polymetal, the first time they have held miners in the fund since 2009.
Beagles believes the consistent de-rating of the sector has presented selective opportunities and the Glencore board in particular have a very different mind-set to the expansionary vision that has been a staple of the industry for many years. With high share ownership among the new management he has conviction that this is not a false promise.
‘The euphoric view that the Chinese boom will last forever has come out of prices and has made these companies think about capital allocation and capital discipline,’ Beagles told Citywire Selection
‘The Glencore board have been very clear about how aggressively they are going to cut back on capital expenditure. This is a very different message from miners over the last few years.’
This is an attitude that Beagles feels will translate into income for his investors.
‘We believe the yield will grow quite quickly and free cash flow of between 13-15% can be expected, which within a couple of years could easily yield around 5%.’
While the prospects of traditional miners like Glencore are driven by this ‘economic euphoria’ he believes that gold miners, such as Polymetal, are in fact inversely correlated to this trend as a result of the precious metal's safe haven status. However, it does share the characteristics that Beagles looks for and ‘again, it has got a very clear capital allocation and dividend policy,’ he says.
While he does not have a firm view on the direction of the gold price from its current level, it is hard to ignore a firm with such strong fundamentals, he says. The total allocation to mining is 2.65%, less than half the market weight of 7.2%, with 1.9% in Glencore and 0.75% in Polymetal.
Limited upside in 2013
Despite this move into more traditionally cyclical stocks, the team has been ‘changing down a gear’ in the belief markets have run a little high. At the beginning of the year their assertion was that markets could be expected to make a 12-15% return in 2013 and despite gains of around 10% so far, they still believe this holds true.
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