Argonaut’s Natural Resources Fund returned 3 per cent in the 12 months to March, a far cry from the near 40 per cent return in 2022 which catapulted it to the top-performing fund in the 12 months to September 30 that year.
But the portfolio bounced back strongly last month with a 7.8 per cent gain as its heavy exposure to the surging copper price paid dividends through ASX-listed names like FireFly Metals, AIC Mines, Sandfire Resources and Metals Acquisition.
Indeed, a growing number of resources funds are banking on copper as a key source of future returns, with Argonaut bolstering its exposure to the metal from 10 per cent of the portfolio to over 20 per cent.
Booming demand for copper, exemplified by BHP’s $60 billion bid for resources heavyweight Anglo American this week, is being met with extremely tight supply, which has rocketed prices to a two-year high.
The rapid pace of copper’s advance has forced analysts to upgrade their price forecasts for the metal, which investors believe will continue to flow through to corporate earnings and boost valuations.
Ausbil’s Global Resources Fund is also heavily relying on copper to fuel its recovery following a disappointing 12 months when the once high-flying strategy returned negative 44.4 per cent.
That performance conceals a 5.7 per cent gain in March, when the fund’s heavy exposure to copper through international companies like Nevada Copper, Freeport-McMoRan and Ivanhoe Mines combined with ASX-listed Sandfire Resources to lift returns.
That coincided with its exposure to the energy sector through Karoon Energy, Santos and Occidental Petroleum, and uranium stocks Nexgen, Paladin Energy, Cameco and Uranium Energy Corp.
Contrarian call
However, Ausbil’s ongoing exposure to the languishing lithium price continues to weigh on the fund. One of its largest positions is Pilbara Minerals, which is the most shorted stock on the Australian sharemarket.
But co-portfolio manager of Ausbil’s resources fund, James Stewart, believes Pilbara’s short interest isn’t driven by large investors but rather a very broad range of smaller ones fuelled by a bearish view on lithium prices.
Ausbil is bravely betting against the army of shorters and believes lithium prices are on the cusp of a recovery, which will fuel a rebound in its holdings of stocks such as Firefinch, Wildcat Resources and Liontown Resources.
“We have a very different view on the commodity price, and some of that’s driven by our view on supply chains and some of that is driven by what we see as wrong data coming out of China on battery levels,” Mr Stewart said.
That dynamic forms part of Ausbil’s view that commodity markets have transitioned back to trading on fundamentals. This represents a shift from the past 18 months when market returns were being driven by macroeconomic concerns including growth expectations and interest rates.
“We think most of that uncertainty has washed through now,” Mr Stewart said. “Commodity markets are now effectively back to bottom-up fundamentals which is really what drove our returns during the first couple of years of the fund when we performed strongly.”
That view is shared by Terra Capital’s chief investment officer, Jeremy Bond, who noted that the fundamentals of tight supply and improving demand across most commodities this year was being overlooked by investors who were largely fixated on the magnificent seven tech stocks.
“Sentiment in the commodity sector in early February was so disconnected from the fundamentals, which is typically a pretty good time to buy. But there was so much money flowing into seven companies that meant the resource sector was at the bottom of the pecking order,” Mr Bond said.
“But we’ve started to see big money coming into the sector in the first quarter, so there’s been a realisation that there’s deep value there. February was the bottom point and things have rebounded nicely since then.”
Indeed, investors have begun piling back into physical commodities, with Bank of America’s monthly fund manager survey showing a record jump in allocations to the asset class this month.
That helped Terra’s Natural Resource Fund post a 6.5 per cent return in March, marking a rebound from the negative 3.3 per cent it reported in the 12 months to March.
Like Ausbil and Argonaut, copper is among Terra’s largest commodity exposure, followed by gold and uranium.
