Why this fundie is overweight lithium, underweight iron ore

To the rest of the world, Australia is arguably best known for three things - our love of sport, our glorious beaches, and our ability to dig up a lot of resources out of the ground before shipping it to anyone who needs it. And no one knows resources and the diversification opportunity it presents in portfolios like Daniel Sullivan, Janus Henderson's Head of Global Natural Resources. 

Sullivan recently spoke to the benefits and structural tailwinds for the major natural resources (metals, energy, and agriculture) at an investors' webinar. He argues that, despite the massive valuations some stocks are attracting, the wider opportunity set is still under-owned and undervalued by most investors.

"They are so different and often overlooked, and so they can get undervalued through both their cyclical attributes, but also just through people's lack of interest in the quieter times and then often have very large performance runs in high growth periods," he said. 

Commodities are also a good inflation hedge, and this is true across the spectrum from precious metals to agricultural assets. 

But given it's such a huge universe, where do the best opportunities lie for Australian investors? Sullivan's views on that question are the subject of this wire.

Overweight mining and metals - but not all metals

The fund has nearly half its weighting in companies exposed to the global metals thematic. Depending on your metal of choice, it's been a choppy market for most of the last 10 years and certainly since COVID-19. Sullivan says there has been a glaringly obvious trend in favour of dividend payouts instead of project maintenance and keeping up with demand. 

"It's true that over the low commodity period, say five or six years back, companies really weren't in a position to spend a lot of capital going for growth," Sullivan explains. "Investors didn't trust them and wanted them to give any cash back through dividends and buybacks. So given the long deep restructuring, I think that's left us with a shortage of projects and probably some catch-up capital needed."

That catch-up is most evident in metals which are needed for the energy and EV transition. 58% of all car sales are expected to be electric vehicle sales by 2040 and the copper needed to produce everything from buses to the hybrid family car will only continue to increase. 

So it should not surprise you one bit that some of the fund's largest holdings are in companies like global giants Albemarle (NYSE: ALB), Lithium Americas (NYSE: LAC), Toronto-listed Hudbay Minerals (TSX: HBM), and Australian stalwarts Pilbara Minerals (ASX: PLS) and Sandfire Resources (ASX: SFR).

What Sullivan is less optimistic on is iron ore and steel. The economic concerns stemming out of China have caused the team to reduce its risk and exposure to that country, as difficult as that is.

"We have a few ways of sort of defraying that risk," he said. "We are less exposed to steel and iron ore markets than the Australian index, which is extremely highly levered into iron ore through BHP (ASX: BHP), Rio Tinto (ASX: RIO), and Fortescue (ASX: FMG). It's a risk and we are aware of it," he added.

The end of oil and gas is not on the horizon

While some are sounding the death knell for fossil fuels, Sullivan has a more constructive view of the role oil and gas companies will play in the energy story.

"There's a lot of noise around the end of oil and gas, either because we're running out of it or because we need to stop using it for carbon control reasons for greenhouse gas reasons. But actually, it's a massive industry and it's still alive and well, and probably will be well out through 2050," he said. 

The fund holds a stake in oil driller APA Corp (NASDAQ: APA) and Warren Buffett's favourite energy play Occidental Petroleum (NYSE: OXY).

But given he is a champion for natural resources, Sullivan and the fund also have holdings in a range of new world companies like Uranium Energy (NYSE: UEC) and one-time Enron subsidiary (now hydrocarbon explorer) EOG Resources (NYSE: EOG). 

Above all, Sullivan likes companies which are not dependent on the underlying commodity price.

"We like our companies to be active and doing things and we don't want to be just tied to the commodity," he said. 

Salmon, berries, and tractors

Finally, the fund has exposure to the global agriculture and food security mega-trend. Within this, they focus on three key areas:

• Fertiliser and food production chemicals;
• Forestry for wood building products and;
• Paper and packaging

They also have exposure to companies that own forestry lands - giving them access to the property and the businesses turning the wood into profit. Within food production, the fund has held machinery giant John Deere (NYSE: DE) in the past as well as companies that produce the actual food itself (salmon, apples, and even berries). 

And in the timber byproducts business, Sullivan is focusing his time on companies that can integrate renewable elements into its everyday operations.

"Some of these companies may get the chance to do primary carbon capture and make money out of that as that industry grows," he offered.

"And then on the wood product side into housing, this is a great growth area where wood's a fantastic product being renewable but also being way more sustainable compared to concrete or steel. And the products can be extremely varied and very durable.

So we're now seeing super high quality timber frame buildings around the world, most capital cities in the world have at least one signature timber building. And I think we're gonna see an awful lot more of that," he said.

You can access a full replay of the webinar here.

Learn more about the future of resources

Daniel and his team invest in high-quality mining, energy and agriculture companies with the flexibility to invest across the supply chain, taking advantage of price shifts between upstream and downstream sectors and across industries. For further information, please visit the fund profile below.

Managed Fund

Janus Henderson Global Natural Resources

Global Shares

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