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Special Report

ESG: The metrics jigsaw


Chinese growth gives commodities a boost

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China’s voracious appetite for commodities has given a fresh impetus to commodity funds. With a five fold increase in demand for iron ore in 13 years, China has now overtaken the US as the world’s largest consumer of not only iron ore, but steel and copper as well.
One fund that sees growth opportunities in this appetite is Merrill Lynch International Investment Funds (MLIIF) World Mining Fund. The fund, launched 10 years ago, has $1.2bn (e1bn) assets under management. The bulk of this comes from institutional investors.
The fund invests in metal producers rather than the metals themselves. Evy Hambro, the manager of the fund says the fund’s portfolio strategy is optimum exposure to the commodities China lacks. “We focus on companies that are best placed to benefit from China’s structural shortage of key raw materials, specifically iron ore, nickel, copper and alumina”
Companies that produce these four key commodities comprise about half of the fund’s portfolio. This is paying off already, Hambro says. CVRD, a Brazilian company, which represents 6.3% of the fund’s holdings, has produced an annual yield of 10%.
The fund is looking for high beta opportunities that will give maximum exposure to the cyclical upside, says Hambro. “Risk reward favours a more speculative approach at this stage of the commodity cycle, so we’ve increased exposure to ‘speedboats’ - smaller riskier companies that we think will do well with a recovery in metal prices. These have a higher beta to improving commodity markets, and we hope to gain some useful outperformance if markets continue to improve.”
The fund also invests in the super tankers of the mining world such as Rio Tinto and BHP Billiton. Some have produced speedboat style returns.
The fund is taking some big bets. Against the HSBC Global Mining Index the fund is 10% underweight in North America, 3% overweight in China and 12% overweight in Latin America.
However, Hambro thinks the risk is justified. “Mining funds are always going to be volatile compared with other funds, but given the growth opportunities that. China represents, the prospects for 2004 are good.”

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