Global Resources Fund
The Craton Capital Global Resources Fund invests primarily in companies operating in and exposed to natural resources, renewable energy and their related industries. Typically, the holdings in the fund represent companies involved in the fields of metals and mining, commodities, renewable energy, agriculture and technologies that improve the efficiency or environmental impact of raw material or energy usage. Global energy usage is at the start of a long-term trend away from fossil fuels and investments in this sector are not included in the fund.
The global drive towards a more sustainable use of natural resources and energy usage is gathering momentum. The transition will make significant changes to the usage and demand for many materials, metals and commodities. This adds to the existing long-term growth in demand for commodities due to rising populations, industrialisation and living standards. As growing demand meets finite resources, excellent opportunities arise for companies, and their investors, involved in exploration, production, processing or distribution of natural resources, or in improving the efficiency of resource usage.
The investment universe for the fund is broad, covering many types of resources - across all stages of development and value-chains and driven by a range of top-down factors - across the globe. The broad resources universe allows for a flexible sector allocation to capture the most compelling sub-sector dynamics.
Along with society’s focus on sustainability, investors are increasingly recognising the importance of high levels of environmental, social and governance standards within companies. Natural resources companies often have a higher level of responsibility in these areas, and consideration of ESG criteria plays an important role in selecting high quality, sustainable investment cases for the fund.
With thousands of listed companies, and an aggregate market capitalisation of trillions of dollars, resources-related investments are simply too big and important to ignore in a diversified investment portfolio.
Craton Capital, with nearly two decades of natural resources investment history, has the track record and ability to help investors benefit from exposure to this important growth area of the coming decades.
Stock selection process
To reduce the complexity and size of the universe and focus research efforts on the highest quality companies with the best potential returns, investable sub-sectors and companies are filtered through a custom-developed quantitative screening and ranking process.
Top-down: The screening process of the global resources sub-sectors takes into account multiple qualitative and quantitative factors. These factors centre around supply-demand patterns and the inventory situation of the underlying commodity; the sub-sector market structure and related leading indicators; and government policies and political changes. The top-down ranking process divides the sub-sectors into three categories: overweight, neutral and underweight.
The team aims to identify the most value-creating sub-sectors and their relative valuation, with a guideline portfolio exposure limit of some 40% for any single sub-sector.
Highly disciplined bottom-up approach
Bottom-up: The sub-sector ranking yields a Craton ‘universe’ of around 500-600 companies. A thorough due-diligence filters that list to around 250 actively monitored stocks. Research takes place within the context of economic models developed over many years, incorporating a range of experience and expertise covering every aspect that bears on a company’s ultimate share price. The team assesses the quality of the asset (such as exploration volume, cost structure, available infrastructure), asset location (politically security of the domicile), asset mix (exposure to the dynamics of the individual resources/sub-sectors), quality of management and financing (e.g. available funds/ability to access capital), ESG factors scoring (using ESG data vendors, with an overlay of own internal scores) and the valuation (significant discount to NAV).
The goal of the process is to build a comprehensive and accurate assessment of the true value, the probability of it being unlocked and the risks associated (whether operational, financial or due to ESG issues).
Different members of the team bring complementary skills to the table according to their particular blend of expertise. Extensive discussions take place throughout the assessment resulting in an invaluable expertise overlap with the portfolio manager making the ultimate decision as to whether or not to recommend the stock. The fund usually holds no more than 30-40 shares, with the guiding principle that it is quality, not quantity, which optimises the risk/reward profile.
Holding for the long term
Once a stock recommendation is implemented, the intention is to hold it for the long term. We make our recommendations carefully and stand by our choices. Unforeseen events do occasionally upset ‘the best laid plans’, and revisions and adjustments have to be made. The universe in which the fund operates requires an inherently longer-term investment horizon.
The transition towards a new energy framework, the growth of middle-income populations and the requirements to upgrade aging or inefficient infrastructure all support the long-term demand for metals, natural resources and new energy technology.