M&G Global Basics comes with significant risk, but we think it holds appeal for the right investor.
This fund isn’t your typical global equities fund. Unlike most of its peers, which tend to invest across the spectrum of economic sectors, this fund is devoted to basic industries worldwide. Manager Graham French focuses on raw material producers (e.g., mining, coal, oil and agriculture) and manufacturers (e.g., clothing, steel and automakers), while largely ignoring companies in areas like financial services and technology. He’s historically favoured energy, mining and precious metals (his area of expertise) over manufacturers. Today, the fund remains resources-heavy, with over 15% in mining shares and about 15% in energy as of October 2006.
This big resources stake has boosted the fund’s returns to dizzying heights since 2003, but it’s a cause of concern for us. Such heavy commodity exposure comes with considerable risk: The prices of energy and metals can fluctuate sharply on a wide range of factors, and companies involved in these areas tend to be much more volatile than non-commodity shares. Further, these sectors have done very well in the past few years and it’s not clear that their strong growth can continue.
That said, we think there’s a lot to like about this fund. Graham French has over a decade of experience in managing global equities, and strong expertise in commodities and mining in particular. The four funds he manages (this one since 2000, M&G Managed Growth since 1996, M&G International Growth since 2000, and the US-based Vanguard Precious Metals & Mining Fund since 1996), all rank in the top quartile of their Morningstar categories over the past three years, and in the top third over the past five years. Further, French’s success is grounded in fundamentals, rather than simply a chase of commodity prices. He looks for low-cost producers with strong cash flow, good management, attractive price to book ratios, and some sort of tangible assets with multiple uses (holdings such as starch producer Corn Products International, for example).
French has also recently begun to focus more on consumer companies that he thinks can benefit from the growing consumer class in emerging economies. He sees holdings like Colgate (maker of toothpastes and dental floss) as well-positioned to take advantage of growth in emerging economies, while having sufficiently diversified businesses to mitigate the risk of new market penetration. If French continues in this vein, it could cut the fund’s risk and make it easier to use.
As it stands currently, this fund is quite risky, and we don’t believe it is suitable as a core equity holding. But, we think it’s well-managed and offers a good choice as a supporting player in a portfolio, for those who can stand the inevitable sharp downturns that come with resources investing.
