Update on Commodity holdings

27th May 2011

You will have seen quite a lot of press commentary recently about commodities and the prices on the physical market. Within the last month one of the large American trading banks issued both a sell and buy note on the sector all within a very short time scale. This sector remains for us a high conviction position for our higher risk portfolios.

We thought it might be helpful if we gave you little background to some of the performance in our key holdings in this area. The Gold and the Oil prices have moved higher again since the start of the year. In our holdings we have chosen to play these sectors through Investec funds which invest in related mining company equities.

Despite the rise in the underlying physical commodities, shares have gone the other way since the start of the year. The Gold fund has detracted from performance during the last few months.

The gold miners are sensitive to rising energy costs as this is a big part of their production costs.

The market has factored some of this into prices whilst oil prices were rising strongly.

Also one of the key holdings in this fund launched a bid for another mining company and raised money from market to finance the bid. This wasn't well received and the shares fell quite heavily.

Investec are of the opinion there is nothing wrong with the deal and it will be earnings and profit enhancing. They think the upside in this stock is about 40% from here.

I have spoken to the manager of the Gold and Energy funds and based on the current estimates they hold for each sector they think the shares have at least a 30% upside from here.

We see no reason to alter our views on either Gold or our current holdings. We think gold will remain well supported as confidence in paper currencies wane with various governments coming under pressure to reduce their deficits. Sometimes having higher conviction holdings can lead to some periods of underperformance however we also believe they will give us much more contribution to outperformance when the market reassess the equity valuations against the current commodity prices. Our positions can change rapidly from time to time but in this instance we think the market has focussed on too short a time frame and we will be rewarded for our position with a bounce back in prices well before the end of this year.

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