JPMorgan Natural Resources - Why dropped like a stone?

jabbahut40

Hi,

Like many others I hold JPM Natural Resources in my portfolio and have done so for more than 5 years.

Upon checking my funds recently I noticed that it has consistently dropped like a stone since Jan 2011. Any ideas why and what are peoples view on continuing this as a long term hold?

http://www.trustnet.com/Factsheets/Factsheet.aspx?fundCode=SPCOM&univ=U&pagetype=performance

Thanks,

Jabba

Reaper

To start with many people thought the recession would follow the usual "V" shape, with things getting better by now. However it now looks like the world faces a long period of poor growth or even further recession, and weak economies with poor consumers use less resources.

China is one of the key resource users and even they have not escaped. There is no debate that their economy is hitting a bad patch, the only discussion is how bad it is/will be.

Your fund has not performed any worse than competitors such as First State Global Resources. Whether you continue to hold it depends on what you think will happen to the world economies over the next few years - will they fair better or worse than predicted?

cashbackproblems

I hold this but dont contribute into it anymore as iv switched to First State EM Leaders, but i think long term it will come good, as mentioned above economies such as China, India, Brazil, Russia etc have not performed or grown double digits which has an impact on their commodity requirements. Gold is down which is one big area of the fund and iron ore demand is down, however both are in limited supply and will always increase long term. IM not sure what % of the investment is in exploration companies (oil/gas) that is the more risky area.

srcandas

I think NR value will drift up gradually over time for the reasons others offer; but gradually with ups and downs.

The numbers coming out of China look encouraging at the moment (as do the US employment figures) but not sufficient to use up the current NR over production. That will need a global recovery and Europe has I think a long way to go.

I will continue my policy of Asian equity in special sits to get the best out of the slow global recovery over the next two to three years. But each to their own

bowlhead99

A general decline from beginning of 2011 is not out of line with the sector, neither was the huge gains for the two years before the beginning of 2011.
See link for a comparison to the investment trust I hold in the NR sector, City Natural Resources
http://www.trustnet.com/Tools/Charting.aspx?typeCode=FITCYN,FSPCOM

You can read any number of online sources to try and work out why the sector and specifically JPM NR is down - I presume you read the commentaries in their monthy factsheets? Although JPM now holds a chunk of Rio Tinto and BHP Billiton, it has always had quite a bit of exposure to smaller companies which can be good in a bull market and bad in a bear market. Over 2011 for example, gold price was up 9% or so, while the share price of smaller gold companies were not - equities markets are fickle. Other natural resources prices were down quite a lot- silver down 10%, aluminium down 20-30%, copper down significantly, gas down hugely. If you look at London Metals Exchange prices, a tonne of steel has gone from ~$600 in Dec 2010 to ~$300 now.

This is all driven by global supply and demand - and the reduction of growth rates in economies like China and India (not to mention the financial problems in the West which we're all too familiar with) have hit commodities prices hard. Companies are closing mines where the cost of production means it's not economic to keep operating them. If you're a smaller miner, this is not great for your share price. If the price is borderline with your production cost, your company has huge operational gearing - if gold is at $1700 and it costs you $1600 to produce it, you can produce a million ounces for $100m profits every year and your company's valued at a billion. If gold is at $1595 and you can't improve your production cost, you make nothing. A simplification but you get the point.

The flip side is that if commodity prices start to rise again you can get a lot of value growth very quickly. I have some shares in a FTSE 100 listed company Randgold, they mine in Mali, Congo etc. Costs them $700-800 an ounce to mine. With gold at $800 in 2008 their share price was £20, whereas its been £65-75 in recent months.

The outlook for the resources sector is uncertain. You can argue that if the price of certain commodities is under the cost of production, this will not be sustainable. Those closed mines will reopen when people need the iron or platinum or whatever. But whether this is in 2 years or 10 years is your problem.

If the value of resources is driven up by increased demand or reducing supply:
Supply constraints - lack of long term project finance from banks etc; global conflicts; nationalisation, taxation
Demand growth - from emerging and frontier markets and a shift of economic power towards poorer nations which leads to investment in resources from everybody to secure supply

There's also the fact that inflation and money printing will increase the price of a pint of oil or a brick of gold in nominal terms.

Resources-focused funds are high risk as we all know. The City Natural Resources fund I hold is only 1.5% of the SIPP that it's in, which is not my only pension and my pensions are not my entire net worth. I do of course have exposure to the sector through general global funds, emerging market funds etc and some shares in individual companies.

sabretoothtigger

There's also the fact that inflation and money printing will increase the price of a pint of oil or a brick of gold in nominal terms.

The price of fuel is also rising. Gold miners have done especially bad so that fund will have suffered from that.

They own FCX which dropped 20% last week. They have moved into the oil sector which the market did not like ? They should do better in the long term.
So long as this fund doesnt sell out at the bottom, it should also do well. One to put on my list I think

Why have they sold EGO

If you measure the market in ounce of gold, the whole stock market is a bear market.
If tracking Randgold vs gold price, it went sideways and they'll always be troubles so I think thats the best to hope for so this fund has alot to make up

Goldcorp, awful performance over 3 years but only recently bought into the fund

BHP not good. Another miner who have increased their fuel resources, natural gas which has gotten cheaper

Rio bad

Glen_Clark

bowlhead99 wrote: »

if gold is at $1700 and it costs you $1600 to produce it, you can produce a million ounces for $100m profits every year and your company's valued at a billion. If gold is at $1595 and you can't improve your production cost, you make nothing. A simplification but you get the point.

It gets a lot worse if you have to close a mine. Redundancy payments? Do you keep paying to maintain the mine or let it flood and become unusable for ever? In which case it may cost you a fortune to restore the site to suit the environmentalists.
So miners tend to keep going, running at a loss, playing a game of chicken with their competitors in the hope their competitors will close first, and the price will rise again.

jabbahut40

Thanks for the above responses. An interesting read...key question for me is should I hold or transfer? My inclination is hold as I agree with that this fund will slowly increase over time as demand returns from EMs.

Jabba

StevieJ

I sold the First State resources fund in April 2011, methinks it is a good time to get back in.

sabretoothtigger

jabbahut40 wrote: »

Thanks for the above responses. An interesting read...key question for me is should I hold or transfer? My inclination is hold as I agree with that this fund will slowly increase over time as demand returns from EMs.

Jabba

The real advantage comes when you can buy regularly. I like when they pay dividends, I can then decide when to put them back in but its lots more profitable to be spreading buys into the low prices.
If it recovers some of your money gains massively, helps make up for buying at a high

Transfer is ok if you know a better fund to hold instead. People often switch to cash which is not going to perform. Sometimes a switch to a tracker is a fair compromise, you are at least reducing costs so its a kind of damage control

jabbahut40

Thanks. Any thoughts on the new manager (Neil Gregson) and whether this is likely to influence future recovery in this fund?

Jabba