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Resource sector stocks find favour with specialist funds

INVESTORS in resource stocks have generally enjoyed strong returns over the past three years.

The strength of the resources sector has been particularly evident over the past 12 months, when returns from resource stocks have more than doubled the returns from the rest of the market.

The S&P/ASX200 All Resources Accumulation Index, which measures the value of Australia’s main ASX-listed mining and resources companies, rose by 23.1 per cent over the 12 months to March.

This compares with the 10.4 per cent rise in the S&P/ASX200 Industrials Index over the same period.

Investors wanting direct exposure to the rally in resources stocks have two options – invest in specific stocks or use specialist managed funds.

BT, Colonial First State, ING, Rothschild and JBWere all offer managed funds that invest exclusively in resource stocks.

The best performer has clearly been Colonial First State’s Global Resources Fund, which has returned 27.39 per cent per annum over the past three years (see table).

The BT and Colonial Colonial funds take a global view of the resource sector, and Colonial currently has about two thirds of its money in companies listed outside Australia.

Rothschild’s Natural Resources Fund invests up to 25 per cent in international companies, while the ING and JBWere funds invest purely in Australian stocks.

The Australia-focused funds are heavily dependent on just four stocks – BHP Billiton, Rio Tinto, WMC and Woodside – which account for about 80 per cent of the resources index. They also have less ability to invest directly in sectors like platinum, palladium, diamonds and aluminium, in which Australian companies have limited exposure.

The strong returns from resource stocks generally reflect several factors, including:

p the improved gold price;

p the weak Australian dollar, which boosts the $A returns for exporters;

p takeover activity, such as the bidding battles for North, Normandy Mining and many smaller companies;

p industry consolidation, evidenced by the formation of global powerhouses like Rio Tinto and BHP Billiton; and

p a cautious approach to investing in new projects.

Colonial First State head of global resources David Whitten said industries where consolidation already had occurred were characterised by higher returns.

He said resource companies were assessing potential projects very carefully before making any commitments, in contrast to the mid-1990s, when some companies lost heavily on new investments.

The Colonial fund has a portfolio of 48 companies, with its core holdings in large groups like Alcoa, BHP Billiton, Rio Tinto and Brazil’s CVRD.

Mr Whitten said geographic boundaries were becoming increasingly irrelevant, since the major resource companies were often listed in several markets and their operations spanned the globe.

A feature of resource stocks is that they have relatively low dividend payments compared with industrial stocks. In addition, their dividends have low franking credits because they often derive a substantial portion of their income from outside Australia.

Therefore, they suit investors seeking long-term capital growth rather than a regular, tax-effective income.

The funds tend to shy away from speculative exploration stocks. For instance, ING’s Resources Opportunities Fund does not invest in any purely speculative stocks.

The Colonial fund has no more than 10 per cent of its money invested in companies primarily involved in exploration.

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