Why this fundie is steering clear of ASX mining shares

Not everyone is piling into the ASX resources space.

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Key points

  • ASX mining shares have rallied hard this year as commodity prices have driven higher
  • One money manager has sat on the sidelines and stayed true to his firm's mandate
  • Commodity baskets are cooling off in late March, as tech shares start a snap-back rally

Markets are rangebound today with the S&P/ASX 200 Index (ASX: XJO) trading 29 basis points higher at 7,408 and the S&P/ASX All Ordinaries Index (ASX: XAO) up 30 points to 7,691.

Leading the pack today are the Aussie miners in a trend that's been in situ since the beginning of 2022. Whilst the broader market edges forward, the S&P/ASX 300 Metals & Mining Index (ASX: XMM) has spiked 1.4%.

You may assume most professional money managers are positioning themselves to benefit… but that's not necessarily the case.

Some experts are steering clear of the sector and focusing on long-term fundamentals versus current market trends.

When ASX mining shares run, they 'tend to run hard'

Commodity markets are gliding in 2022 — that's no secret. Brent Crude futures are up 19 points today as Brent Crude oil charges to US$119 a barrel again.

Gold has spiked back towards its previous highs after testing the US$1,920/t.oz mark three times in the past week. Other commodities such as coal, copper, natural gas, and wheat are all in the green today as well.

In fact, the entire market has been propped up by financials and resources in 2022.

Near-term gains are being driven by "macro themes such as inflation, supply chains, and input price", says fundie Richard Ivers. He's the portfolio manager for Prime Value Asset Management's Emerging Opportunities Fund.

"Not investing in small resource stocks has been a headwind over the last six months," Ivers told The Australian Financial Review.

"When resources stocks run, they tend to run hard, like we are currently seeing," he added, referring to the enormous gains commodity traders have racked up in 2022.

But Ivers isn't focused on the near term.

Capital preservation over the long term

Whilst it may have been hard to sit on the sidelines and watch the rally from a distance, Ivers says he prefers companies with pricing power versus those who rely on market conditions.

"We have a clear mandate to prioritise capital preservation over the long term, which means resources and speculative stocks are not our focus, even if that means we leave some short-term returns on the table," he said.

"Ultimately, we prefer companies which are price makers, rather than price takers – resource company earnings are driven by commodity prices which are unpredictable and influenced by macro factors, which are very difficult to forecast".

Ivers notes the fund focuses on companies with predictable earnings and robust fundamentals versus secular trends. The fund uses an absolute return benchmark of 8% instead of chasing an index.

Top picks for ASX shares

Ivers hammers in the old finance adage that cash is king and valuations do matter for the long run.

"We're not traders. We are high conviction investors and prefer companies with a high certainty of future earnings and cash flows. This makes future value more certain."

Futures on various commodity baskets have already started to cool off. Their parabolic charts are receding towards long-term averages.

Not only that, it appears tech names are starting a revival, with the S&P/ASX All Technology Index (ASX: XTX) soaring 2% higher this week and 11% over the past month.

The fundie said some of his firm's favourite picks are Kelsian Group Ltd (ASX: KLS) and News Corporation (ASX: NWS).

Motley Fool contributor Zach Bristow has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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