Ask A Fund Manager
The Motley Fool chats with fund managers so that you can get an insight into how the professionals think. In this edition, Shaw and Partners portfolio manager James Gerrish explains why ASX shares in the resources sector are so appealing to him at the moment.
Biggest convictions
The Motley Fool: What are your two biggest holdings?
James Gerrish: Right now BHP Group Ltd (ASX: BHP) and Oz Minerals Limited (ASX: OZL) are our two biggest holdings in our Flagship Growth Portfolio. Obviously two very high quality companies in the resource sector, which is an area we are bullish on over the next few years.
They're very much from a bigger picture thematic. While we believe inflation is transitory, it still is there and it's still going to be there. In an inflationary environment, resources tend to do reasonably well.
In an environment where there's this large energy transition that's happening, obviously as we move more towards renewable sources of energy, that does have a huge requirement for raw materials. So that's going to be supportive of the resource side as well.
Then you overlay that with [how] the major resource companies around the world have been pretty reticent to make large scale investments in new supply over the last couple of years. Obviously there are some, but you've got a situation where you've got lower increases in supply, meeting a period of higher demand, with a backdrop of higher inflation, which I think is going to be really supportive of resources, in the timeframe of the next 3 years or so.
I think probably the easy money in the resources is probably gone if we take a short term view. So, in the short term, I wouldn't be surprised to see some reversion out of resources into tech. But I don't sit here and go, we need to be buying technology here for the next 3 or 4 years. I think that's a shorter-term trade. Whereas, resources, I think are a longer-term, 3-plus year trade.
MF: Is it ironic that, as we're moving to a lower carbon and greener future, resources companies are actually becoming more important?
JG: Yes, it is. But also the right resources companies.
This is why it creates a higher barrier to entry for newer resource companies, the way the end customer is requiring resources to be mined and produced.
If you think of the requirements that Tesla Inc (NASDAQ: TSLA) puts on their suppliers, [it] is hugely onerous. The ability to track all the different stages from an ESG point of view is really difficult, and it requires a lot of investment. These incumbents that have got scale, are going to be more highly valued in my mind. It will allow them to buy supply from juniors that don't.
The ASX share for a comfortable night's sleep
MF: If the market closed tomorrow for 4 years, which stock would you want to hold?
JG: The resource sector is the area we are most bullish on over that time frame. For an active style investor like ourselves to commit to a stock for the next 4 years, quality would be a very important metric to consider. While it's not cheap at current levels, Oz Minerals is one of the highest quality copper companies in the world and we think they can deliver decent returns over that time period.
