(pictured: Jeremy Bond)
In the longest bear run in global mining stocks since FTSE’s index was launched in 1985, a focus on Australian-listed small resources, including theme-driven lithium (batteries) and potash (fertilizer) stocks, gave one local manager an 87 per cent absolute return in the past 12 months.
Terra Capital, the Sydney small and micro-cap manager which has two funds – small-cap natural resources and ‘new horizons’ for non-resources – is celebrating by hiring a new junior analyst, Will Thompson, taking the investment team to the grand total of three.
Terra Capital was formed by former hedge fund manager and analyst Jeremy Bond, who launched the natural resources fund in June 2010, and was then joined by Matthew Langsford, an accountant and former broker. They launched the new horizons fund, which looks for tech-focused and emerging small and micro caps, in January this year.
Bond says the research that the team does is very time intensive, often including six meetings a day, due to the paucity of generally available research in the space occupied by both funds.
Bond and Langsford co-invest in the two funds, allowing dividends to roll back in the form of extra units. Thanks to an ATO change effective from this June, they will not be required to pay tax on this sort of roll back before they get the income in future – a change which should please most investors in unit trusts.
Even though Bond and Langsford are both “finance guys” rather than geologists and engineers, who tend to populate the profession of resources investing, they believe this is an advantage. They are less likely to “fall in love” with a commodity, stock or mine, they say.
“We’re both very comfortable with our knowledge levels and abilities to analyse resources investments, as well as those for new horizons,” Bond says. In addition to his time as a portfolio manager at UK hedge fund RAB Capital Bond was also an analyst at a Western Australian corporate advisory firm, Azure Capital, which had a lot of mining company clients. Langsford worked at Ernst & Young and before that as a small-cap broker.
The universe of specialist resources funds has shrunk in the commodities downturn, with Pengana and Caledonia closing theirs in the past couple of years. The main remaining competitor For Terra Capital which also invests globally is Colonial First State’s global offering, although that has a large-cap bias.
Bond says his fund will “almost always” be invested in Australian, Canadian or UK-listed resource stocks. He currently doesn’t hedge against the British pound but may start to do so as the fund grows. (It currently invests $40 million, with Bond the largest single unitholder.) The Canadian dollar tends to track the Aussie fairly closely, he notes.
The stocks tend to range between $100 million and $500 million in capitalization, with about 35 per cent of them being domiciled outside Australia currently. “I want to continue to use the contacts I developed when I was in London,” Bond says.
Apart from the tilts to lithium and potash in the past couple of years, the resources fund benefited from an avoidance of coal, iron ore and base metals. “Geologists seem to love base metals,” Bond says. The fund, which currently has its largest commodities exposure to gold, got up to about 35 stocks as the sub-sectors ran but has subsequently been tightened back to about 20 stocks.
The smaller – $25 million – new horizons fund is more skewed towards micro caps, with a usual range of between $50-300 million in market cap. The core positions are at the top end of the range.
The fund also looks at themes, such as agribusiness, in which the manager has had some recent successes with a tech-driven seeds producer, and is looking for further exposure. Generally, its tech-oriented companies need to have global application. Another recent winner was Emefcy, an Israeli-based ASX-listed company which has a new waste-water treatment technology. So far so good. The fund has returned 29.2 per cent in its first nine months.
“I think that investors are looking for something other than index returns,” Bond says.
Fund administration is outsourced to Mainstream BPO and custody to JP Morgan. The funds area available to sophisticated investors only, with minimums of $50,000 to be invested.
