Will RMB be proved right on resources?

While today's Business Day (18/11) reports that gold has surged to an 18 year peak and the platinum prices are at all-time highs, Rand Merchant Bank Asset Management has an underweight position in resources. This is hurting the 12 month performance of the company's unit trust funds.

Unlike most other asset management companies, Rand Merchant Bank Asset Management do not have a Resources unit trust fund, a contentious issue at RMB for many years. When challenged on this point, RMB representatives always point to the fact that resources can be accessed through the Top 40 Index Fund, which of course is true.

RMB' s best performing fund over 12 months is their RMB Top 40 Index fund; a fund which cannot avoid investing in resources. The top three investments of this fund are Anglo American Plc, BHP Billiton and Sasol Ltd.

The RMB Equity fund managed by Ian Power and Shaun Bruyns has steadily lost its place in the performance rankings over the last year. Power and Bruyns seem to have read the retail and banking sectors well, which translated into an excellent performance over a three year period. However the fund has lost its sparkle over a twelve month period as the sector rankings have shifted gear, favouring commodity companies.

The RMB Equity Fund has only one resource company in the top ten investments; a 7.7% exposure to Anglo Amercian. The RMB Value Fund managed by Stephen Brown and Mashuba Cassim, presently ranked fourth out of seven value funds has an exposure of 7.09% to Anglo American and a 3.82% exposure to Highveld Steel and Vanadium. Most Domestic Equity and Value Funds have higher exposures to companies that make their money from resources.

Questioned about RMB's house view on resources, fund manager Royce Long explained that in the short term, earnings were assured and the momentum of the Johannesburg Stock Exchange supported a strong resource weighting.

'However the resource cycle is approaching maturity as interest rates in the United States rise,' he said. 'History has shown us that the prices of commodities generally trend down after a peak in US interest rates. Valuations are relatively stretched and shares are vulnerable to movements in share price.'

He said that foreigners had invested R38 billion in the JSE to date, and that in the event of a sudden movement out of South Africa, institutions were, by and large fully invested and did not have that much cash to pick up the slack. Furthermore, foreigners have mostly invested in the larger companies on the JSE, so leading resource companies are relatively vulnerable.

He also drew attention to the fact that commodity prices were no longer moving in sync. He said that steel prices and the coal price had started moving down, possibly signaling a beginning for other commodity prices to follow suite.

On the other hand, the Financial and Industrial sector has greater earning predictability with lower risk. We think that valuations of companies in these sectors are therefore more compelling, he said.

On the South African economy in general, he explained that while the South African economy looked favourable for earnings growth, risks were rising as the prospect for higher interest rates were emerging.

'The economy should continue to perform acceptably well in the absence of better value offered elsewhere,' he said.