Global Resources Fund
The Craton Capital Global Resources Fund invests primarily in companies operating in and exposed to natural resources and their related industries. Typically, the holdings in the fund represent companies involved in fields like metals and mining, commodities, oil and gas, electricity generation, agriculture and forestry. It also includes related utilities and services.
The investment universe for the fund is global. There are around 8,000 listed companies across all equity indices worldwide (of which around 3000-4000 are investable), totalling a market capitalisation of several trillion US$, representing a meaninful percentage of all listed equities. Resources-related investments are simply too big and important to ignore in a diversified investment portfolio.
The Global Resources Fund was established to offer investors the option to invest in this wider universe. It is rooted in the conviction that rising populations, rising industrialisation and rising living standards will assure strengthening global commodities markets over the coming decades, thereby delivering good returns for well-run, well-focused and well-located companies operating in that marketplace. The broad resources universe allows for a flexible sector allocation to capture the most compelling sub-sector dynamics.
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) and the valuation (significant discount to NAV).
This analysis yields around 100 modelled companies, the goal being to build a comprehensive and accurate picture of the inherent risk/reward proposition of each investment candidate. The overarching target is to spot the true value and the probability of it being unlocked.
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. Finally, the team gets together to discuss and assess the outcome, working together with the portfolio advisor who makes the ultimate decision as to whether or not to recommend the stock.
Of the actively modelled company stocks, the GRF fund invests in no more than 30-40 shares. The guiding principle of the advisors is that over time, 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.
So long as populations continue to grow and people everywhere continue to seek a better life for themselves and for their children, the demand for energy, metals and agricultural products will steadily rise.