Great Investment Articles

Tue May 22, 2007 9:11AM EDT
By Dominic Lau

LONDON (Reuters) - Investors who think it is too late to get into commodities-related stock because the market has risen so much are "crazy" as prices will only go higher due to tight supply and growing demand, JPMorgan Asset Management said.

Ian Henderson, fund manager of the UK-registered JPMorgan Natural Resources Fund, told Reuters in an interview that China's latest move to rein in its booming economy would dampen speculative activity but metal inventories remained low.

"I think people are crazy not to be in it (commodities). I just can't imagine anybody being so naive as to imagine this is not a revolution like the way people have never seen before in their lifetimes," Henderson said late Monday.

"It's absurd to imagine that with the enormous amount of infrastructure going on, whether that be railroads or roads or power stations or subways or airports, this is other than a revolution in terms of demand going on."

The fund, which invests mostly in stock and is 1.18 billion pounds ($2.33 billion) in size, has handed investors more than 22 percent in returns this year as of the end of April.

Its portfolio consists of: base metal and diversified 37 percent; gold and precious metals 27.5 percent; energy 25 percent; diamonds/other 8.2 percent, with the rest in cash.

Henderson, with 35 years of investing experience, also said there was no risk in investing commodities.

"For mineral producers the current situation with the arrival of China, India and other emerging markets as major commodity consumers sitting down to the table, can be likened to a hostess having prepared a dinner for eight having a further eight guests arrive for whom no food has been bought or prepared," he said.

The fund manager said that the emerging economies accounted for 29 percent of the world's gross domestic product, bigger than the United States, and were growing by 5 to 10 percent a year, supporting the demand for raw materials.

"The basic outlook is that most people imagine that mining companies will be able to bring new projects into production on time and on budget," he said.

"The honest truth is that at least in the past five years people's expectations for production growth had been almost twice as great as the actuality."

Energy supply would also remain tight as companies were finding it difficult and expensive to accelerate their exploration programs, said Henderson, who has run the fund since 1992.

As for stock picks, the fund manager said he liked "small and micro cap" companies, where half of his fund is allocated, but he declined to give any names.

But, he added, there was good value in the larger companies.

"Among the big companies, I would buy almost all of them today. All the major companies are undervalued quite a lot. And if I have to rank them in this very minute, I would be buying Norilsk (GMKN.MM), CVRD (VALE5.SA), (RIO.N)," he said.

"Their commodity mixes are quite favorable. The markets are not valuing them using sensible forward earnings estimate. In addition, in the case of Norlisk there will be an $8 billion return of equity by way of a distribution of their energy subsidiary next year."