Standard Life Investments’ £20 billion Global Absolute Return Strategies (Gars) fund has initiated a new relative value position backing global miners over Swiss equities.
The MSCI Metals and Mining index has lost 10.8% over the past year, while the MSCI Switzerland index has gained 22%.
‘We believe that global miners are deep-value companies,’ investment director Adam Rudd explained. ‘It is pretty well recognised by most investors that the commodity super-cycle has perhaps run its course. Because mining companies spent a lot of the additional cash flow that they had on capex, resulting from higher commodity prices, there was significant underperformance for the miners as costs overran and the companies were not as profitable as they have been.’
But Rudd contended that the miners were now poised for an earnings recovery that had not yet been priced in to their share prices.
‘There have been significant changes in management at a number of the large mining companies and there seems to be a genuine change in focus on capital discipline and cutting capex expense. This will allow the mining companies to outperform in terms of earnings expectations,’ he explained.
Rather than simply going long miners, though, Gars has opted instead for a pair trade on the basis that they will perform relatively better than Swiss stocks.
‘We feel the Swiss Market Index (SMI) is expensive,’ Rudd noted. The Swiss market has a forward price-to-earnings ratio of 15.6 and a price-to-book multiple of 2.8, according to MSCI, while the equivalent numbers for miners are 12.4 and 1.4.
‘The SMI has benefited from stable consumption in the markets that the Swiss market is exposed to: very defensive healthcare and consumer products,’ said Rudd. ‘There has been a re-rating, we think, to reflect both continued strong growth and stable earnings, but this raises downside risks in the event of a pickup in growth and a loss of interest in expensive safe-haven assets.’
Over the past three years Gars has returned 20.1%, placing it second in its Citywire Alternative Ucits Multi Strategy category where the average fund produced 8.3% through the same period.