Jordan Tang, Head of Retail Distribution, interviews Daniel Sullivan, Head of Global Natural Resources, about the previous decade in resources and the outlook ahead for the mining, energy and agriculture subsectors.

Interview transcript:

Jordan: Since I caught up with you last time, back in October, the resources sector is up about 4.5%. We’re at the start of a new decade, but what’s the last decade been like for resources? Were there any surprises or disappointments?

Daniel: Since we started the Fund in 2012 (so nearly a decade), we added agriculture right from the start, and that’s been well-validated. It’s a great sector and there’s been a lot of innovation, a lot of new things happening in food. On the energy side, it was really strong in the first half, and then there was a bit of disruption later on with the oil shale boom and more recently with the renewable energy boom. Both of those have been positive but disruptive, so an interesting situation. In metals and mining there was a pretty heavy downturn in 2015. We’re well recovered through that and companies are in great shape and we’re looking forward to a strong outlook from those guys.

Jordan: ESG and sustainability are words that get mentioned a lot at the moment and we’ve obviously seen Greta Thunberg being very active in the media around people needing to change their habits. How have resources companies reacted? What are they doing around ESG and sustainability and how do you look at that as part of your process?

Daniel: It’s been integral since we started, but it is developing all the time and it’s now in the forefront of everybody’s mind. In every conversation we have with pretty much any company, sustainability is right up front. It is affecting companies and it’s coming through legislation all around the world. Things are being banned, while other things are being encouraged. Particularly in Europe, for example, in wind energy, we have seen massive growth there and we expect those types of things to continue and we are grappling with that and using it well in the Fund.

Jordan: And are there more investment opportunities coming up as a part of ESG growing?

Daniel: Yes, absolutely. So that’s encouraging new industry for sure. We’re seeing it in things like the replacement of meats in proteins, we’ve already seen big growth in soy beans generally for food into China. We’re seeing it in the electric vehicle revolution and battery storage of electricity. There are all sorts of new things that are growing and they’ve got their own mini cycles, which is complex, but interesting to work with.

Jordan: And getting back to today, what are the exciting opportunities that you see for 2020 that are becoming part of the portfolio, or hopefully for clients and investors, something they can get excited about?

Daniel: So on that vein in agriculture the Europeans are at the forefront of the sustainability revolution and a lot of the companies there are a long way ahead, particularly forestry companies have really transitioned to become biological companies, and they’ve got a lot of scientists and they’re creating products that you can’t imagine, but most of these companies now claim that pretty much everything you can do with a non-renewable, you can do with a renewable source. So that’s the path we’re on. In electricity, all the big oil companies are pivoting to electricity, that’s creating new markets and new pressures as well. And, as I say, things like wind power generation in Europe are pushing upwards now, some countries are getting 100% of their power from wind on a daily basis and Europe as a block is probably getting to 20% and they’re moving to push that quite aggressively. In metals and mining environmental pressure is severe, so what we’re seeing is a real push towards innovation in automation, waste management and getting people away from dangerous areas and getting waste away from people. So all those companies are interactive in that and we’re working with them to keep increasing our focus in those sorts of areas.

Jordan: So for someone who’s looking at the sector, what’s your outlook for 2020 in terms of valuations, income levels, what are debt levels and P/E ratios* like for companies?

Daniel: So the big restructuring that went through after the 2015 downturn has remained, the companies are very disciplined and a lot of the big mining companies have virtually no debt. Their cash flow is very strong and the dividend yield for those companies are still in excess of 5%. For smaller, nicher companies we can get yields now over 10%, so we have a bit of that and equally we do give up some yield go into the more exploration side of companies and some of those are delivering great results globally as well as in Australia. So there’s a good spread of opportunity across the Fund and we try to have a balance across different things. The yield in the Fund is around three and a half per cent and the valuation is quite low, particularly compared to other global equities, so we are in a good place to offset other parts of peoples’ equities portfolios.

Jordan: Thank you very much for your time, Dan. For those of you who are interested in our Fund and want to know more, please go on to our website. We really want you to consider resources as part of your long term investment strategy. They’re one part of the market that is shown to be uncorrelated to more traditional asset classes and can provide some diversified return opportunities for your clients, strong valuations, and with a pretty attractive yield coming through at the moment. Thanks again for your time.

Filmed 24 January 2020.

* Price to earnings (P/E) ratio: A popular ratio used to value a company’s shares. It is calculated by dividing the current share price by its earnings per share. In general, a high P/E ratio indicates that investors expect strong earnings growth in the future, although a (temporary) collapse in earnings can also lead to a high P/E ratio.