JPMorgan Natural Resources -48% down but still hanging on

racing_blue

Accepted Bowlhead, that these are two different beasts. I am trying to understand how different and wonder why.

Is it due to weighting? Exchange rates/ presence of non-GBP denominated companies? Other reasons?

http://uk.investing.com/indices/mining-components

http://www.hl.co.uk/funds/fund-discounts,-prices--and--factsheets/search-results/j/jpm-natural-resources-accumulation-inclusive/fund-analysis

bowlhead99

racing_blue wrote: »

Is it due to weighting? Exchange rates/ presence of non-GBP denominated companies? Other reasons?

All of the above.

The JPM fund certainly has companies listed abroad (like Freeport McMoran, Lundin Mining etc) within its top 5 holdings, which are not even in the UK 350 index.

Although your point about 'non-GBP denominated companies' being a valuation driver is a bit of a red herring, given that the biggest in the UK index are massive multinationals, some with a variety of international listings in different prices; it doesn't really matter whether you quote Rio or Billiton or Glencore in US or Canadian or Aussie dollars or pounds or reals or rand before you convert it back to pounds, as the underlying assets you hold will be the same. You could buy Rio in Australia or New York or London at different prices but your 'currency exposure' is the same because the underlying assets and income streams are the same and that is what drives the price - the price per unit of ownership is consistent across the exchanges even if rate changes move one price and not another.

If you look the the FTSE 350, groups like Glencore and Rio Tinto and BHP Billiton will have market caps of £30bn+ while smaller groups like Randgold might be more like £5bn and Petra Diamonds will be £1bn or less. So if you put them in a cap-weighted index, you won't have very much exposure to the smaller ones.

While if you look at the JPM top ten holdings at year end they had about twice as much in Rio as in BHP (6.7% vs 3.3%) and they had more in Petra Diamonds (3.8%) than in BHP too. While in the FTSE, BHP is the largest holding. In fact because of its huge market cap, the relative effect on the FTSE from a movement in BHP is probably 50x greater than a movement in Petra.

So, JPM hold companies in different proportions, and they hold a much greater weighting to smaller companies, and they hold companies that don't have a UK listing. While the FTSE 350 index (filtered to mining companies) only holds companies with a UK listing and is hugely skewed by valuation changes in two or three leviathans.

If Rio and Glencore and BHP don't halve in value, the 350 index won't halve in value. But the JPM index easily could, because the three aforementioned giants are only 15-16% of its asset value.

EdGasket

You are all missing the most important aspect, the commodity cycle. This is driven by over-investment when prices are high followed by a fall in prices when there is subsequent over-supply but little demand as we currently have.
See:
http://www.bloomberg.com/news/articles/2014-07-16/goldman-sees-lower-commodity-prices-over-five-years-on-supplies

or just google commodity cycle. Not much joy for many years yet.

racing_blue

EdGasket wrote: »

You are all missing the most important aspect, the commodity cycle. This is driven by over-investment when prices are high followed by a fall in prices when there is subsequent over-supply but little demand as we currently have.

. Not much joy for many years yet.

I'm hoping to get in before the joy!

hyposmurf

racing_blue wrote: »

I'm hoping to get in before the joy!

Same here its part of my portfolio and been topping it up now and then.

Thrugelmir

racing_blue wrote: »

The JPM fund appears to have gradually and consistently lost ground. So where as the FTSE 350 mining index is now 20% lower than in October 2012, the JPM fund is now about 40% lower.

Can anyone explain why this is? Am I missing something obvious?

When companies go bust. You lose your shirt. Your capital has irrevocably been lost.

Whereas the index merely drops the bust Company from the index and replaces it with another.

The weighting of the index fundamentally changes in the process.

bowlhead99

Thrugelmir wrote: »

When companies go bust. You lose your shirt. Your capital has irrevocably been lost.

Whereas the index merely drops the bust Company from the index and replaces it with another.

The weighting of the index fundamentally changes in the process.

While this is true, it doesn't really make much of a practical performance difference when dealing with a market cap weighted index heavily skewed to the largest holdings, like FTSE100 or FTSE350 Mining.

Example in the FTSE 100, you have companies worth £1700billion. Lets say Glencore worth 35bn or Tesco worth 20bn, dies.

If you held it in an active fund or personal portfolio until it totally dies, you lose your shirt, as you say. If you held Glencore in the private fund at similar weight to the FTSE100 you lose 2% of your overall portfolio.

Whereas, if you held it via the index, you may lose less. If it died quickly, you would still lose all the £35bn of value of course. But if it died slowly, and the active manager didn't choose to exit, the index fund would definitely exit when the next quarter end auto reshuffle came around. So, perhaps the investor holding the index would lose *less than* all the value of the company as it declines from being worth £35bn to being worth <£2bn and then the index reshuffle would happen. The index holder didn't take a full loss on the company. Instead they only lose 33/35ths of 2% of their fund. In other words you have lost 1.9% instead of 2%.

Then a new entrant joins the FTSE100. They come in towards the bottom end of the scale at maybe £4bn. The index fund manager has a reshuffle because he doesn't own any of this company and needs to have 4/1700ths (0.24%) of his total pot invested into Newco. So, he sells just 0.24% of all other holdings to raise the necessary cash to add Newco to the portfolio at a 0.24% weight. You can say "the weighting of the index fundamentally changes" but the effect of Newco coming in is pretty unnoticeable because its weight is so tiny.

So, with the extreme example of a company completely going to the wall, the active fund lost 2% and the index fund only lost 1.9%. Then the index fund took on a new holding at a pretty irrelevant and unnoticeable 0.24% weight. The active fund manager may or may not choose to take on a new company in his own portfolio and have a bit of a reshuffle.

But the disparity of losses between the active fund (if the company dies slowly so that the index has time to sell it for some value at a quarter-end auto reshuffle and the active fund manager chooses to hold instead and not sell during this time) is about 0.1%, in a situation where a company that's a 50th of the portfolio goes bust.

This is not going to explain a difference in performance between the two funds of several percent. The auto exit and entrance process is something that sounds like it might make a difference, but is really a red herring as it doesn't in practice.

In cap weighted indexes, the exit points are so low as a proportion of the overall index, that you still get very nearly all the losses that you would by not exiting.

If you looked at a smaller company the percentages are different. Say a smaller company in the FTSE 100 that's only £5bn starts to go bust. It might get kicked out of the FTSE at 3bn so the index owner 'only' loses 40%. But that size of company is so small and irrelevant to the index (being only 5/1700ths of the index in the first place) that whether you retain 60% of the value or lose 100% of the value, it's unnoticeable within the overall performance.

Clearly, the fact that active funds are affected more by small companies than index funds are, is an important difference. Active funds do not usually have the huge disparity of weighting between companies that you would have in a cap weighted main index and so the risks are different, from different concentrations. But the premise that

When companies go bust. You lose your shirt. Your capital has irrevocably been lost.

Whereas the index merely drops the bust Company from the index and replaces it with another.

is not something that in itself accounts for significant performance differences. In the case of the JPM fund vs the index, the disparity is just because the set of companies and weighting of companies is so fundamentally different as to give entirely different results. In that context the fact that the index is 'evergreen' and companies have a threshold to get auto-replaced, is a bit of an irrelevance. It is already an apples to oranges comparison so it doesn't matter whether the apples are granny smith or golden delicious.

mike88

How anyone can even think about selling after suffering a 48% is inconceivable. You should either have a decent stop/loss system in place to minimise losses at a far earlier stage or just hang in until performance improves. You have not gained or lost anything until you sell.

EdGasket

mike88 wrote: »

How anyone can even think about selling after suffering a 48% is inconceivable. You should either have a decent stop/loss system in place to minimise losses at a far earlier stage or just hang in until performance improves. You have not gained or lost anything until you sell.

I've had to do just that on occasions where I can no longer justify my investment. What you have lost is irrelevant to the company and its current prospects which is what you need to consider when deciding whether to hold or not.

An easy to understand example is where it looks like a company is going broke. In that case, and I have done this more than once, you have to get out quick and salvage what savings you can albeit at a huge loss. The case for a fund like JPM resources depends on whether you think resources are a good investment right now. Personally I don't and in that case rather than have your money bleeding away for the next ten years, you would be better off moving it to an area with positive prospects where you can increase your wealth.

Doshwaster

mike88 wrote: »

How anyone can even think about selling after suffering a 48% is inconceivable. You should either have a decent stop/loss system in place to minimise losses at a far earlier stage or just hang in until performance improves. You have not gained or lost anything until you sell.

I'm 45% down overall with Blackrock Gold & General but I'm hanging in there and have no interest in selling. The fund is up 20% in the last 3 months so maybe the good times are just around the corner.