A Basic Affair
If Rio Tinto is an unwilling partner in the takeover dance led by BHP Billiton, will China’s top steelmaker Baoshan Iron & Steel, better known as Baosteel, make a better suitor?
Speculation was rife this week that Baosteel may bid at least $200 billion for Rio Tinto, even after Baosteel’s chairman Xu Lejiang denied this outright. Rio, the world’s third largest mining group, has shunned a $125 billion takeover proposal by its bigger rival BHP.
The possibility of a merger between BHP and Rio Tinto is causing tremors among steelmakers who rely on both companies for hundreds of millions of tons of iron ore each year.
A combined BHP-Rio would hold about 27 percent of the world market for iron ore. It would also control the global flow of coal, copper, uranium and diamonds. Steelmakers have called for competition regulators to block any merger. Chinese steel mills have gone as far as asking Beijing to set up a national iron ore reserve.
Baosteel and other state-owned Chinese firms have been cutting deals across the globe to secure raw material resources that are vital to the growth of its booming economy.
This, together with increase global demand for raw materials, has driven prices of commodities to unprecedented levels. The price of lead has risen 46% year-to-date while copper is up 5%.
In fact, the price of copper has risen to the point where copper U.S. pennies are worth three or more cents each just in copper bullion value, bringing new meaning to the phrase, ‘save your pennies’.
Which brings us to our featured fund this week -- the M&G Global Basics Fund.
M&G Global Basics Fund
|Fund Size||US$5.819 million|
|Management Fee||5.25% per annum|
The M&G Global Basics Fund targets companies in basic industries around the world. This ranges from mining companies, food producers, to manufacturers, and up the value-chain one notch, to firms that service these groups.
Graham French, Fund Manager of M&G Investments, sees the best investment opportunities in commodities such as platinum and coal – the supply of these raw materials can’t keep pace with increased demand from emerging economies. "This situation creates significant potential for certain resource companies to earn premium returns. It also means the future of the industry is in the hands of those suppliers."
"I believe these areas contain the companies that are driving economic growth worldwide and, as such, represent the ‘building blocks of the global economy," said French.
These "building blocks" fall into two categories – primary industries are resource based, such as those in commodities like metals, minerals and agricultural produce. Secondary industries consist of companies that make products or provide services that are used by consumers or industries.
The fund takes a back-to-basics approach when it picks stocks to invest in. Companies must have:
- undervalued assets that are driving the business
- strong management teams that are using these assets efficiently
- cash-generative operations and robust finances
A proven business model and good corporate governance are also important on its checklist. "I hate to invest in stocks that the average investor would not be able to understand. If I cannot explain to an investor in a few minutes what each company in the fund does and how it earns its money, then I have a problem with it," French said.
Key to the fund’s strategy is to identify fundamental trends, such as changes in consumer behavior or demographic patterns that benefit companies significantly in the long run. "Such investment themes, if anticipated correctly, can offer major opportunities for the fund when pursued over the long-term periods necessary for them to be fully realized," he adds.
The fund has gained from natural resources companies that have done very well due to strong commodities prices. An example French gave is Peabody Energy , the largest coal producer in the US and a key holding in its portfolio.
Companies in the secondary industries are also drivers of the fund. The reason? As economies become more developed, consumers tend to spend more on food and housing and other products and services. In fact, French said that over the past year or so, M&G has been shifting the fund "away from the more 'basic' end characterized by resources, towards more value-added areas such as infrastructural development, consumer goods and travel."
Sometimes, a company that seems an odd fit with the fund’s investment criteria catches his eyes. Cooper Companies , a contact lens manufacturer in the US, is a leader in a highly consolidated industry. French said that cases of myopia are increasing sharply and remain high on many emerging countries' healthcare bills. He believes Cooper "is well placed to take advantage of this development."
French stressed that the M&G Global Basics Fund is suited to investors who take a long-term view, with a holding period of at least 3 to 5 years. As of 31st October, the fund is up 18.2% year-to-date.
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