FYI...Time to take profits from miners? Top fund managers give...

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    FYI...Time to take profits from miners? Top fund managers give their views

    Time to take profits from miners? Top fund managers give their views

    By James Phillipps | 10:45:08 | 28 September 2009

    With the mining sector up more than 80% since the March trough, fund managers are split on whether to keep riding the commodity wave or take profits.

    Basic materials took a hammering last year, as the bubble burst on the back of the spike in risk aversion and the collapse of global economic growth prospects. Now, after being at the forefront of the rally, fund managers face the call of whether to hold or fold miners.

    Richard Buxton, manager of the Schroder UK Alpha Plus fund, says miners could well see a correction in the short term, largely because of profit-taking and the fact that valuations have got well ahead of the Baltic Dry Index to which they are fairly closely correlated.

    However, at 11% Buxton remains marginally overweight the sector in his fund and has no plans to reduce this. ‘Anything that has risen that rapidly could easily fall back and we could see mining shares down by 25% to 30%,’ he said. ‘Such setbacks are part and parcel of investing in mining stocks and you have to ride through them. ‘I would not necessarily sell the sector down aggressively and may use it as a buying opportunity.’

    Buxton has been a big fan of miners for some time, and when he did reduce his exposure in the second quarter last year it was the first time he had sold a mining stock for four years. He says the massive spike in the oil price drove what was clearly a speculative bubble, but after that unwound he was able add positions at severely beaten-down prices.

    ‘Some of these companies fell by 80% in the second half of last year, and you have to be careful anchoring off those lows as you can come up with some spectacular numbers. You have to remember that in January and February the market was pricing in a multi-year depression,’ he noted.

    Standard Life Investments’ head of UK equities David Cumming also remains bullish on the sector, and the majority of the group’s UK portfolios are carrying heavy exposure. He has an 11.6% position in his UK Equity Recovery fund and says it would only take a little improvement in the US housing market to see an uptick in demand for copper and aluminium, for example. ‘The market has continually underestimated Chinese growth for five or six years and Asian growth remains robust, which increases demand for commodities,’ he said.

    Not all fund managers are convinced. SVM UK Absolute Alpha fund manager Colin McLean exited his positions in Anglo American and Antofagasta this month. He is concerned that the recent commodity price rally has been driven more by restocking rather than ongoing activity, and he notes that China’s stockpiling of iron ore is slowing.

    PSigma Income fund manager Bill Mott is even more bearish. Income constraints aside, he is only holding an underweight position in BHP Billiton, and like McLean is put off by the fear that share prices are only being driven by restocking and speculation.

    ‘The global economy is recovering, but growth is going to be anaemic for a few years. China and emerging markets will grow faster, but won’t be able to decouple completely. The miners have moved ahead of the reality of the economic landscape,’ he said.

    Mott, along with many other managers, backs the long-term structural growth story, but with even the bulls saying a pull-back is likely, taking profits short term and buying into the dips looks a prudent strategy.

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