More innovation in investment products is finally emerging in the resources sector.
State Street Global Advisors' launch last month of a resource-sector exchange traded fund (ETFs) is an important development for investors seeking low-cost exposure to mining indices. The SPDR S&P/ASX 200 Resources fund is the fifth ETF launched over ASX-listed mining or energy stocks in just over a year.
In February, a new ETF entrant, BetaShares, launched a "synthetic" or "swap-based" ETF, the BetaShares S&P/ASX200 Resource ETF. Australian Index Investments last year launched three resource-sector ETFs: the Aii S&P/ASX 200 Resources ETF, the Aii S&P/ASX 200 Energy ETF, and the Aii S&P/ASX 300 Mining and Metals ETFs, which is based on a broader index of resource stocks.
In 2009, ETF Securities listed five exchange traded commodities (ETCs) over gold, silver, platinum, palladium and a basket of commodities. The ETFS Physical Gold ETC has net assets of $585 million and is second by size to State Street's SPDR S&P/ASX 200 ETF ($2.34 billion), Morningstar research shows.
BetaShares' S&P/ASX 200 Resources ETF is the largest mining-sector ETF, with $37 million in net assets. But it could be overtaken by State Street's resource-sector ETF given the popularity of the SPDR series of ETFs among investors.
The mining boom has clearly created an opportunity to list ETFs that provide diversified index exposure to mining and energy stocks, with lower annual management costs than unlisted managed funds. Also, the low number of specialist resource-sector managed funds might have opened a door for more index products, which investors and self-managed super funds (SMSFs) can use for passive long-term exposure to mining indices, or tactically to take advantage of opportunities.
Morningstar data shows 23 unlisted resource-focused managed funds had combined net assets of $2.53 billion at the end of February. Commonwealth Bank's Colonial First State Wholesale Global Resource Fund is the biggest with $1.4 billion, followed by Credit Suisse Enhanced Commodity ($389 million). Only six funds have five or more years of performance history, which makes it harder for investors to gauge how the majority of funds perform through stages of the resource cycle.
The small size of the resource-specialist managed funds segment is surprising, given the magnitude of the sector's boom. One theory is the 13.25 per cent investable weighting of BHP Billiton and 3.27 per cent Rio Tinto in the S&P/ASX 200 index - and their much higher weighting in resource-sector indices - makes it harder for resource-sector funds to beat their local benchmark index.
Another theory is the lack of investment choice outside the top-10 mining stocks for funds that require established, profitable large and mid-cap local resource companies with liquid shares.
Despite these challenges, the performance of the top resource-specialist managed funds has been strong.
Colonial First State Wholesale Global Resources Fund returned 15.54 per cent, and Colonial First State MIF Resources Fund 14.4 per cent, annually over 10 years to February 28, 2011, Morningstar data shows.
The median one-year return from resources funds is about 27 per cent, which is much stronger than the return for benchmark resource indices, such as the MSCI Customised All Countries Resources index, which returned - 13.94 per cent over one year to February 28, 2011.
A newer entrant, Lime Street Capital's LSC Australian Resources Hi-Alpha Fund, returned 88 per cent over one year.
Listed investment companies (LICs) are another avenue for resource-sector fund exposure. The LIC sector has been partly re-rated in the past 12 months because of two key developments: the change to the Corporations Act in June 2010, allowing companies to pay dividends as long as they are solvent; and financial planning reforms that will ban new commissions on managed funds from July 1, 2012.
Three resource LICs are listed on ASX: Global Mining Investments (capitalised at $249 million), LinQ Resource Fund ($183 million) and Global Resource Masters Fund ($111 million). ASX data shows that Global Mining Investments traded at an 18 per cent discount to net tangible assets (NTA) at March 31, 2011, LinQ at a 31 per cent discount, and Global Resource Masters Fund at a 3 per cent premium.
The new resource ETFs and ETCs might attract funds that can use them tactically to capitalise on short-term changes in sector sentiment or commodity prices, and create "alpha". And lower ETF and ETC management costs compared to unlisted and listed resource managed funds could appeal if fee pressure for institutional investors intensifies.
