Argonaut Funds Management is a high conviction investor in the Australian resources sector. It manages two resource funds;
- The Argonaut Natural Resources Fund, which invests in the Australian resources sector, operating as a wholesale fund open to sophisticated investors; and
- The AFM Perseus Fund, which invests in the small resources sector, being those materials, energy and mining service companies outside the S&P ASX 100 Index.
The Fund’s adopt a disciplined and focused investment style, underpinned by our three stage investment process: Step 1 is a review of the current Market conditions; Step 2 is an assessment of the Macro Conditions with the objective of identifying key commodity picks and the preferred investment locations. Step 3 is a Micro assessment of individual companies based on our “5 Bricks” analysis of Management, Valuation, Business Strength, Financial Strength and Responsible Investing.
Both funds have performed very strongly.
The Argonaut Natural Resources Fund commenced on 21 January 2020 and to the end of August had delivered a return of 20.3% versus the 11.3% decline from its benchmark index (S&P ASX 300 Resources Index) – an outperformance of almost 32%.
The AFM Perseus Fund “restarted” on 1 January 2020 after a broadening of the investment mandate and appointment of a new investment team. To the end of August the Fund had delivered a return of 46.4% versus the 6.4% return from the S&P ASX Small Resources Index – an outperformance of 40%. It had also comfortably exceeded its investment hurdle of a 10% return per annum.
Ultimately Fund Managers are rated according to their long term investment record. While we have started well this is only the first step to achieve our objective of being the pre-eminent Australian resource sector funds manager.
These Performance charts assume that an investor invested $1000 at the inception of the Fund (21st January).
Key Investment Themes
We believe that the world is at an environmental tipping point with an accelerating and inevitable trend away from fossil fuels. We expect the next decade to witness significant structural change in the transport and power generation sectors, largely driven by the advancements in battery storage technologies. This will facilitate the shift from internal combustion engines to electric vehicles and from thermal coal fired power stations to renewables and other cleaner fuel sources.
The Australian resource sector is ideally placed to be a driver of this change by providing the required raw materials such as lithium, copper, nickel, rare earths and graphite in a sustainable, ethical and cost efficient manner. As a resource sector fund manager, we see our fundamental role as supporting the sector as it ramps up production of these key raw materials to feed into the battery storage supply chain.
We remain positive on the gold sector. While the gold price has risen significantly over the past twelve months, the world is facing uncertain times with COVID 19, central banks printing money to support global economies, sustained low interest rates, tensions between the US and China, a US election and the growing wealth gap between the rich and poor just a few of the factors to consider. Gold is a proven currency in times of uncertainty and a store of value.
Finally, high conviction investment is about flexibility. While we have core holdings in the base metals and gold sectors, we will also take advantage of opportunities across the resources space if they meet our investment criteria. A good example of this was our investment in the iron ore sector once it became clear that supply was being disrupted from Brazil; the purchase of Santos and Woodside when the oil price plunged in March 2020 and our recent position in the Uranium sector as supply continues to contract and demand increases.
The resource sector, being the materials and energy sectors of the Australian Securities Exchange, represents about 24% of the overall market.
About 66% of the resource sector is represented by the iron ore companies (dominated by BHP, Rio Tinto and Fortescue); 10% by oil and gas; 12% by gold and 12% other.
By contrast our target portfolio mix is 20% gold, 15% copper, 15% nickel, 15% battery materials and 35% opportunistic. Clearly we are a high conviction investor.
While this is our target weighting, this is subject to value and quality criteria as assessed through our three step investment process. The Australian market has only limited pure play copper, nickel and lithium companies which can mean that it is difficult to achieve the target exposures.
The charts above show the portfolio exposures as at the end of August 2020.
Core investments include:
Oz Minerals – Australia’s largest pure play copper producer, which offers a strong balance sheet and arguably the best management team of any Australian resources company.
IGO Limited – Nickel and gold producer with over $500m net cash and significant exploration reach.
Saracen Minerals – A focused high quality Australian gold producer with above sector production growth, high operating margins, strong management and robust balance sheet.
Lynas Corporation – holds a globally significant position in the rare earths market, with its balance sheet enhanced through the recent capital raising.
In summary, we are comfortable with the investment performance of the two funds since commencement and restart, providing some validation for the investment processes established and the key investment themes identified. We will continue to be diligent and disciplined in our research and analysis, remain focused on identifying new opportunities and being flexible when situations change. A good start but early days.
- Nothing in this Article should be construed as personal financial product advice. This Article does not consider any of your objectives, financial situation or needs. It contains general financial product advice only and you should therefore consider the appropriateness of the advice having regard to your situation. We recommend you obtain financial, legal and taxation advice before making any financial investment decision.
- This Article is based on information obtained from sources believed to be reliable. Argonaut has made every effort to ensure the information in this Article is accurate, but we do not make any representation or warranty that it is accurate, reliable, complete or up to date. Argonaut accepts no obligation to correct or update the information or the opinions in it. Opinions expressed are subject to change without notice and accurately reflect our personal views at the time of writing.
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