22 DEC, 2021
By Constanza Ramos
As every month, we analyse Sharing Alpha’s report on European advisors and fund selectors preferred funds. This time, from within all categories, we wanted to analyse the thematic funds included on the list. Each of the funds belongs to a different category, and has been voted by the European fund selectors and advisors on the Sharing Alpha platform.
The Sharing Alpha initiative gives us the opportunity to find out which fund managers and funds are preferred by European advisors and fund selectors. Fund selectors are asked to rate funds according to their expectations based on three parameters (3 P’s):
As mentioned above, on this occasion we have chosen to go a bit deeper in four of the thematic funds included in the list, each one from a different category.
Eric Strand, Manager AuAg Silver Bullet
AuAg Silver Bullet, “Europe´s riskiest fund?” Global debt is soon hitting 300 trillion USD. The debt crisis from 2008 was solved with liquidity and even more debt. Since the financial crisis, the large Central banks’ balance sheets have grown from 5 trillion to over 25 trillion USD. During this period of free money, many companies have gone on a lending spree, putting them in a vulnerable position.
In historical comparison, the precious metals miners are unprecedented cheap and offer great value. A truly exciting opportunity for new investors and existing investors who look to add to their positions. We expect a double for the gold price and even more for silver when the gold to silver ratio narrows in the coming years. This will benefit the miners as they are a leveraged play on the commodities. With low debt levels and record profits, the miners can now also raise their dividends to shareholders, which is another bonus.
AuAg Silver Bullet is a unique fund in Europe, focusing on silver miners. It is an equity fund, long-only and always 97-100% invested, with important factors for the fund being shares liquidity on exchange, mining jurisdictions, and company management.
These miners are very volatile, favoring a fund with 25-30 holdings and UCITS position limits. It is really an “alternative equity” fund as it has a long-term correlation of 0,3 with the broad stock market. AuAg Silver Bullet has great return/risk-enhancing properties for any portfolio.
Precious Metals are indispensable for the transformation to a green world. A green future without them is just a dream. Precious Metals have unique properties, be it for emission-control catalysts for the last 30 years or EVs, and solar panels in the coming 30 years. To invest in the “Best-in-Class” companies and promote change wherever possible is our cause. Therefore, we have an active sustainability process and are proud to work with world leader Sustainalytics to provide us with independent ESG data.
The short-term outlook for price movements of precious metals result from positioning on the COMEX (US Commodity Exchange), market momentum, technical charts, dollar strength/weakness, and Central Banks forward guidance on rate and inflation. Upcoming rate hikes during 2022 will probably be very small as the system cannot really handle large interest costs. As inflation will likely rise faster than rates, it will result in an even more negative real rate. A negative real rate is an environment where precious metals thrive.
David Pinniger, Fund Manager, Polar Capital Biotechnology Fund
The Polar Capital Biotechnology Fund aims to achieve long-term capital appreciation by investing in companies developing and commercialising exciting, breakthrough medicines for a range of serious life-threatening diseases. Our experienced investment team aims to create a well-balanced portfolio of investments in companies at various stages of development, using different technologies to develop new medicines.
Since launch, the team has invested in cutting-edge medical innovation where they believe the stock market is under-appreciating a company’s potential to transform medical research or clinical practice should one of its new drugs, diagnostics or research tools be successfully developed and commercialised.
With a relatively concentrated portfolio of around 50 companies, the team aim to invest sufficiently in their best ideas for them to have a positive impact on performance. At the same time, they are careful to mitigate downside risks should these companies encounter the normal setbacks and delays that are associated with the high-risk nature of biomedical research and innovation. Aware of the high-risk nature of the underlying investments, the structure of the fund is relatively simple with the view that if the team is investing in companies developing and commercialising truly ground-breaking new medicines and high impact innovation, that can create value for investors irrespective of the background stock market environment.
Indeed, over the past 10 years or so, the biotechnology industry has emerged as an exciting growth story for investors. An ever-improving understanding of complex human biology and the emergence of sophisticated new drug development technologies are producing hundreds of better medicines. Using exciting new tools and techniques, scientists are creating more precise and powerful medicines to address the root cause of disease, rather than merely addressing the symptoms, which is better for patients and healthcare systems seeking to deliver healthcare more efficiently. Over that same period, stock markets have been buoyant, and the biotechnology industry has benefited from companies being able to raise substantial sums of capital to invest in drug discovery and development – the industry’s collective R&D pipeline has never had such breadth and depth.
More recently, the pandemic has been a spectacular case study of what the industry is capable of, with the successful development of medicines, molecular diagnostics, and of course highly efficacious and safe vaccines at previously unimaginable speed. That success has driven investor appetite for radical new and potentially transformative biotechnologies such as mRNA, cell and gene therapies, and gene editing which hold the promise of effectively curing life-threatening diseases. Towards the end of last year, this generated bubbles of investor exuberance and excess valuation; this year, however, with broader market appetites changing this exuberance has faded almost as quickly as it arose and, with valuations now moving down towards more sensible levels, it is once again looking very interesting for investors.
While the industry has never been as vibrant and well capitalised as it is today, the speed and intensity of medical innovation has also never been higher, which requires a professional, cool-headed approach to investing. As a team of experienced healthcare investors, we believe we can allocate capital at the right time, to the right people using the right science to develop valuable new medicines that in turn can generate strong returns for our investors.
Marcos Hernandez Aguado, Chief Investment Officer
The LTIF Natural Resources Fund is a long-only fund that invests in natural resources globally. It has a value philosophy which translates into seeking out listed natural resources companies at a discount to their intrinsic value. It only invests in listed companies and does not invest directly either in commodities or derivatives.
The fund is highly concentrated in around 35-40 stocks on average and is currently structured under four investment themes: energy, mining-materials, infrastructure, and agro-food. The objective of this structure is to diversify the portfolio sufficiently to take advantage of investment opportunities in each sub-sector. At the end of 2021, the fund’s look-through is as follows: 35% of assets are invested in oil companies, 15% in gas, 15% in copper, 10% in nickel and another 10% in uranium.
The fund has EUR 70 million under management and for the first time after 8 years of a down cycle, it has very attractive medium to long term prospects due to the significant impact of the energy transition, within a natural resource cycle that just started and is long term (opening new mines or oil wells, if permits can be obtained, typically takes 5-10 years and thus bringing new supply at scale takes a decade).
Climate change and the electrification of the global economy will generate an incredibly large demand for many metals and natural resources such as copper which is used directly in electrification: from electric cars, to wind turbines, to the grid itself etc… will require a huge amount of copper, estimated at around 30 million tns. in 2030 (up from 22 million tns. today). Many other natural resources such as nickel, lithium and cobalt will also be needed, especially for battery production. The fund seeks exposure to these metals in a cycle that its managers believe will last for decades.
Moreover, we are starting from a very low level of investment in the natural resources space since the end of the last cycle in 2012/13. Since then, investment in mines, oil and gas and most commodities has fallen to unsustainable levels due to the low profitability of the sector and a very negative environmental narrative. The combination of low investment for almost a decade and the need for these commodities to complete the energy transition have set the beginning of a new long-term cycle.
Managers also understand that energy is a sector that has a lot of potential in the stock market, especially in fossil fuels space (mainly oil and gas) due to the combination of several positive factors 1) low capex since 2013 which makes it difficult to offset declines 2) capital flight away from fossil fuels and into renewables, including equities, bonds, banks and insurers 3) oil and gas demand growth until at least the 2030s due to emerging markets and transition timelines 4) company valuations at historic lows 5) regime change in most energy companies that have decided to focus on returns rather than growth.
The LTIF NR’s fund trades at EUR 120 per share and according to SIA Funds’ estimates has an IRR on investment of 15%, with a target of EUR 175 over 2-3 years (50% appreciation using mid-cycle valuations) and close to EUR 300 per share at peak valuations.
The Fund aims to achieve capital appreciation by investing at least two-thirds of its assets in equity securities of companies expected to benefit from the development, advancement and use of technology. Franklin adopts a broader definition of “technology”: companies that are creating, implementing, or commercializing new technologies that are used to enhance productivity or create new services.
The investment style is a combination of bottom-up and top-down research. Managers begin with a high-level analysis of a particular sector, identify attractive sub-sectors, and then focus research on those segments before employing a bottom-up analysis to identify the most attractive stocks. Franklin has one of the largest Equity research teams. In addition to that, while the team invest has a global mandate, they benefit from being based in our headquarters in the heart of Silicon Valley.
Recent interactions with investors and clients convince us that the market is attempting to gauge the durability of sector growth in this increasingly post-crisis world. Discussions with sector participants and technology buyers give us confidence that our thesis is on track. Specifically, we believe that COVID-19 accelerated the Digital Transformation (DT) opportunity that we have been talking about for many years now, and that growth will be robust for the businesses we own for many years as businesses and their customers seek to build upon the technology driven productivity gains they built during the crisis.
Despite the recent volatility tied to re-opening, the emergence of the COVID-19 Omicron variant, rising interest rates, increased inflation expectations and a quickly changing regulatory landscape in China, we believe the sector offers solid exposure to strong secular opportunities relating to DT and its supporting sub-themes including (1) artificial intelligence, machine learning and data analytics; (2) new commerce; (3) software-as-a-service and secure cloud computing; (4) digital media transformation and the Metaverse (our newest portfolio focus); (5) digital customer engagement; (6) fintech and digital payments; (7) internet of things (IoT) and 5G; (8) electrification and autonomy; (9) cyber security; and (10) the future of work.
We believe the relative strength of technology, and the aforementioned themes has been driven by investors appreciating that technology was the antidote to many of the operational challenges that the pandemic created.
That said, we do not believe that investors fully appreciate what is coming next as the extended pandemic taught businesses, employees, customers, patients, and students that they could be more productive and have more balanced lives using the new digital skills they built during the crisis. As such, we do not anticipate that the world will return to the pre-pandemic norms. Instead, we expect businesses to operationalise and scale what worked during the crisis, abandon what did not, and continue to iterate. We expect consumers to continue to embrace new commerce tools and to increasingly prefer digitally augmented experiences. Simply put, we believe that the crisis was the beginning of our society’s digital transformation—not the beginning, middle and end of it.