It also said that persistent fears that a slowdown in China and other markets will adversely affect global resources markets are overplayed. Executive Chairman and portfolio manager David Whitten said that the current market represents one of the better investment opportunities he has witnessed in more than 30 years of global resources investing.

90 West also announced this month the launch of the 90 West Global Natural Resources Fund, to allow individual investors to profit from this opportunity.

“Many people might be questioning why we are launching this fund in a depressed market.  Quite simply, the China and emerging markets story, combined with constrained supply in vital areas, cannot be overstated in terms of its importance on the demand supply balance for resources,” Mr Whitten said.

“The world’s largest populations of China, India and Brazil are still at an early stage of unprecedented economic growth.  Even with relatively modest rises in GDP per capita, these populous countries will continue to have a huge long-term impact on natural resources demand, in particular minerals, energy and food.

“At 90 West, we think this is one of the better opportunities from an investment perspective that we have seen in our combined 60+ years of investment experience.”

Mr Whitten said softer markets mean that shares in quality companies are available at very reasonable prices.

“We have managed money through several similar, and in some cases worse, market conditions. These times present a great opportunity to buy quality companies at attractive prices.”

“The S&P Global natural resources index has fallen 15 percent in past year, but the fundamentals are still sound.  Many company balance sheets were stretched around the peak of the market in 2007, but these have been repaired in last few years and a new level of conservatism is in place. In the companies we consider for investment, valuations are attractive and earnings, sound.  We believe that this creates an excellent opportunity for the skilled investor.”

Mr Whitten said some companies finding it difficult to obtain debt and raise equity, which was leading to a delay in projects. However, this is not necessarily a negative for investors.

“In a bear market, excess returns can be easier to find as there is less competition for good ideas. We also see delays in projects as a positive for markets, as a decrease in supply creates discipline and this can mean that the resources cycle could last longer than anticipated.”

Mr Whitten said that investors needed to take a global view if they are to diversify risk and capture full upsidepotential.

“Despite the fact there are around 1,000 Australian natural resource companies, Australian companies comprise only about five percent of total listed worldwide natural resource stocks by market capitalization.  As such, they represent limited exposure to the natural resources sector.”

Mr Whitten said the Australian resources sector was also highly concentrated, with BHP and Rio Tinto representing a combined market capitalisation in excess of 56 percent of the Australian listed natural resource company sector[1].

“For other natural resource sectors such as listed energy and agribusiness companies, the Australian listed segment is modest relative to global stock market opportunities. By market capitalisation, Australia’s energy and agribusiness sectors are individually and combined, less than two percent of the global energy and agribusiness sectors.”

[1] Bloomberg GICS classification & 90 West global natural resources universe

26 July 2012

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• Resources: Investments participating in the energy, industrial metals and precious metals sector.
• Commodities: Investments participating in the livestock, grains and softs (sugar, cotton, coffee, cocoa) sector.
• Agribusiness: Investments participating across the food and fibre production to consumption value chain, including resource owners, producers, facilitators, value adders, collectors and distributors.

Lonsec awarded its premier ‘Highly Recommended’ rating to two Global Equity funds – Colonial First State Global Resources Fund and the Colonial First State Global Resources Long Short Fund; and to one
Australian Equity fund – EIM Emerging Resources Company Share Fund.

Richard Ellis, Natural Resources Investment Analyst, commented, “Although the past 12 months have seen changing economic conditions and choppy financial markets globally, the long term investment prospects for natural resources is positive. Lonsec expects the universe of funds in this sector to grow into next year’s review cycle.”

“The sector has gained momentum in recent years due to several fundamental factors on both the supply and demand side. “

Developments in this sector have been underpinned by increasing public awareness of global population growth, trends in urbanisation and industrialisation, and climate change issues which are driving companies to capitalise on developments in food productivity, carbon, water, energy and renewable energy.

“With the United Nations predicting a 33% increase in global population to 9.1 billion in 2050, Lonsec expects an overwhelming increase in global demand for infrastructure and foodstuffs which needs to be
produced from finite resources,” Ellis said.

Contributing factors for increased demand for Natural Resources

Global population growth is expected to produce a number of interrelated issues and competing forces for global food and resource supplies that present compelling long term opportunities for investments across the full breadth of the Natural Resources sector.

Increasing affluence in developing countries

“The rising income of populations in developing countries, particularly Brazil, Russia, India and China is expected to result in a shift away from starch-based diets to a greater consumption of protein such as beef,
pork, poultry and dairy. Increased protein consumption increases grain requirements for livestock production, which consequently has a multiplier effect on global grain demand,” commented Ellis.

Alternative energy

As a consequence of climate change concerns, alternative energy sources such as biofuels are fast becoming a substitute for traditional energy sources. “The production of biofuel relies heavily on inputs from feedstuffs and consequently increases competition for food supplies,” said Ellis.

Land scarcity

With the urban sprawl effect, competing land uses, land degradation and changing climate conditions impacting on the productivity of some agricultural regions, arable land available for cultivation on a per
capita basis is declining, placing increased pressure on future productivity.

Water availability

Accordingly to UN-Water, just 2.5% of the world’s water is fresh. “This results in considerable pressure to maximise water use efficiency in food production systems to sustain increased productivity,” remarked Ellis.

“Competition for fresh water is also expected to increase in response to population growth and industrialisation.”

Lonsec has witnessed investment management firms respond to demand from sophisticated investors and financial advisers by developing new investment products which are active in the natural resources space.

Products which have emerged are diverse in their investment strategies, although share a common philosophy in that long term opportunities exist in the Natural Resources sector, underpinned by increasing
global demand.

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