Invesco bets on oil, says gold outshines copper

By Claire Sibonney

TORONTO (BestGrowthStock) – Canadian fund manager Norman MacDonald is betting that oil, natural gas and gold stocks, despite fluctuating commodity prices, are the resource picks that will give him the best bang for his buck, but he sees less opportunity in base-metal and potash plays.

The lead manager of the Trimark Canadian Resources fund, which beat the market by more than 6 percent last year, said a key part of his strategy is to focus on the long-term outlook for a commodity and not get caught up in daily moves.

While oil collapsed from $140 a barrel down to $40 between 2008 to 2009, MacDonald profited by blocking out the daily “noise” and sticking with his $55-$60 target, while the stock market priced in an ultra-low oil environment.

“Let’s say I didn’t take that long-term approach, and I just kind of used the day-to-day oil price, I would have ended up selling oil stocks right at the worst possible time, rather than buying them,” MacDonald told Reuters.

“It was a great opportunity to buy oil stocks at very low price to cash flow and price to net asset valuations.”

The C$515 million ($505 million) fund won the Canadian award for 2009 from fund tracker Lipper in the resources equity category for the three-year period. Invesco Trimark is a unit of Invesco Ltd. (IVZ.N: )

Toronto-based manager MacDonald takes a bottom-up approach to stock picking by modeling a company’s cash flow based on an assumed long-term price of a commodity that he’s comfortable with. He evaluates the worth of the business from there.

The fund’s top energy holdings include Nexen Inc (NXY.TO: ), Cenovus Energy (CVE.N: ) and Niko Resources (NKO.TO: ).

MacDonald says oil is a compelling story given rising global demand, particularly with China’s strong growth.

“It’s Asia that’s driving the bus,” he said.

But he cautions that with rising production costs, investors need to factor in at least $60 a barrel to earn a real return.

“Every time you think the oil business is easy you have something that’s happening in the Gulf Coast come up and kind of catch you by surprise,” he added, referring to the massive oil spill in the Gulf of Mexico that has disrupted production and tanker traffic.

In the natural gas space, MacDonald sees more opportunities in the United States than Canada, partly because many of the companies there have high quality assets.

MacDonald noted another of the fund’s top holdings, Range Resources Corp (RRC.N: ), was early in exploiting the U.S. Marcellus shale play and operates on a very low cost base.

“If you look at the price of natural gas, you do have to see some kind of pick-up in U.S. industrial production in order to get comfortable with, let’s say, a $5 NYMEX gas assumption because the one thing that this horizontal drilling technology has kind of shown is there is no shortage of potential supply in the U.S.”

GOLD SHINES BRIGHTEST

MacDonald insists he’s no gold bug, but he’s been adding companies such as Eldorado Gold Corp (ELD.TO: ), Barrick Gold Corp (ABX.TO: ) and other large-cap names because he’s starting to see better value.

“This is the first time in a long time where a lot of gold companies have actually been able to translate a high gold price into bottom line cash flow and earnings.”

He also likes timber and other forest-related companies such as Norbord (NBD.TO: ) and Plum Creek (PCL.N: ) because of the buying opportunities that came after the U.S. housing crash.

However, the fund is substantially underweight in base-metal and fertilizer stocks because, MacDonald says, the high commodity prices are already reflected in stock prices.

“It’s just getting a heck of a lot more challenging to find good investment ideas in the base metals space when you factor in the prices that I use on a long-term basis,” he said.

“Longer term there is an interesting situation developing in potash … it’s going to become a very competitive industry over the next little while … but the multiples of cash flow and the discounted business value have to be sufficient enough for me to earn a rate of return on the investment and I just don’t see it at today’s level.”

MacDonald says one place he won’t invest in is Russia, given political risk. But he said no country is really immune and pointed to Australia’s move on Monday to plan a 40 percent tax on mining profits as commodity prices soar.

“No country is safe in terms of changing the games of business for resource companies.”

Investment

($1=$1.02 Canadian)

(Reporting by Claire Sibonney, editing by Jeffrey Hodgson)

Invesco bets on oil, says gold outshines copper