In commodities, too, many fund boutiques are sought-after contacts for investors as active managers. Markus Hill* spoke for FONDSBOUTIQUEN.DE with Urs Marti, partner at SIA Funds AG, a value boutique from Switzerland. Urs Marti and Alex Rauchenstein will give a joint presentation on this topic on 29.1.2020 in Mannheim (Fund Selectors – INVITATION ONLY format).
Hill: Mr. Marti, 3 years ago, after a long break, you decided to manage a commodity equity fund again. Are you satisfied with the results so far?
Marti: Actually, I am. It’s very similar to the way it was 20 years ago. Analogous to the tech bubble, nobody is interested in the sector, although most commodity prices have already passed the low point since the end of 2015 and are showing a positive development. The companies are healthy, debt has been reduced, nice cash flows are being generated, dividends, share buybacks, etc. Well-known countercyclical value/distressed/macro/long-term investors are also entering these sectors. More and more investors are contacting us. Our events are again well attended, and the topic is increasingly meeting with a positive response. Our fund is well-positioned and now ready for the next phase.
Hill: What distinguishes the Long Term Investment Fund Natural Resources from competitor concepts or a passive product?
Marti: Our focus is clearly on medium-sized companies in the industrial metals and oil sector, agricultural companies, and other sectors. We are no friends of the big energy companies who see their future in the energy turnaround rather than in the oil business. We like companies that benefit from rising prices, that do not have defensive cash flows – and we do not like exploration companies. We also do not own gold mines. This is because gold mines are always more expensive than base metal mines. Besides, there are already some good gold mine funds on the market. I would even strongly recommend investing in these funds. To put it more bluntly, we invest in the type of companies that have benefited the most from 2001 to 2007. Almost all our companies have one thing in common. They have completed the peak of their investments and will reap the rewards in the coming years. For many commodities, we expected a decreasing availability due to underinvestment since 2011, and thus deficits that will persist in the coming years. From this point of view, our companies are in what we call the „value bracket“, i.e. we are in a position to acquire these companies at very favorable terms. For example, our larger companies trade on an EV / EBITDA of 4-6x and the smaller ones between EV / EBITDA of 2-3x. Valued based on current spot prices.
Hill: That all sounds very plausible. What do you think could happen that your expectations for the fund are not met?
Marti: For one thing, the timing of a physical shortage is difficult in the short term due to unknown commodity inventories. But in the longer term, supply correlates with investment, as you have to replace 3 to 5% of production each year due to „depletion“. Probably the greatest risk is that central banks will be too restrictive and cause the global economy to collapse. But that is not our scenario. On the contrary, we expect increasing fiscal measures and a continued very expansionary monetary policy. The commodities sector anticipates that the global economy will stagnate forever and that from today’s point of view the consumption of commodities will only stagnate or decline. Virtually all other asset classes discount very strong economic growth. Either there is one or the other as a perspective. One can imagine the consequences of an eternally stagnating global economy for the real estate market, the tea sector, government revenues, venture capital, private equity, high-yield bonds, and so on. In summary, we find our commodity equity fund interesting, as the expected return for us is 21% for the next few years.
Hill: Thank you very much for the interview and wishing you and Mr. Rauchenstein successful discussions in Mannheim. I am looking forward to the moderation („MH bias“) and I am curious about your presentation!
*Markus Hill has been accompanying events of SIA Funds AG (sponsor) for many years. He is an independent asset management consultant in Frankfurt am Main. (Transparency: See also the imprint of the independent site FONDSBOUTIQUEN.DE). FONDSBOUTIQUEN.DE will be dealing more intensively with the topic of fund boutiques and commodities in succeeding articles. In this area there are many interesting fund boutiques (Stabilitas, Tresides, Commodity Capital, etc.): Input is always welcome here). FONDSBOUTIQUEN.DE does not give any investment recommendations, of course, the active managers compete here with passive concepts