WINTER 2012
(Q4-2011 Data)
Volume 9, Number 1

ommodity related investments had a strong rebound in the fourth quarter following the selloff in August and September. Newgate’s Global Resources Portfolio returned 10.6% in the quarter, compared to a 0.4% gain for the Dow Jones-UBS Commodity Index.

Market Review. As much as we would like to believe, the fourth quarter recovery can hardly be taken as an “all clear” signal. Some market pundits have written off October’s strong rally as merely short covering. The usual fears remain: the unknown ripple effects of the European debt crisis and the potential hard landing in China. However, to a large extent these dominant fears are priced into the financial markets. Furthermore, economic data from the US have been better than expected.

The commodity markets have taken a divergent view from their equity counterparts, which underperformed commodities significantly during the year. The fourth quarter saw a partial reversal of this trend, with commodity equities up and commodities futures essentially flat. Gold is an example of this disparity and consequently an opportunity for investment. Gold rallied sharply in the first nine months of the year, while gold equities were down. Junior mining companies lost more than better established firms. In the fourth quarter, though both were down, gold companies generally outperformed bullion. The drivers of investment decisions for these two assets were very different, even though the two are closely linked economically. We began the quarter with a 2% allocation to gold and ended with a 10% weighting after strategic buying. We believe that gold and silver companies are very inexpensive, even if gold prices stagnate or go lower.

The most important aspect of the oil market was not price itself but the narrowing of the spread between West Texas Intermediate (WTI) crude, the benchmark in the US, and Brent Crude, the European standard. Even though WTI is widely quoted, most oil consumed in the US actually comes from other sources. So the price of gas at the pump may have no connection to the price of WTI. WTI rose 25% during the quarter, while Brent rose only 4.5%. Energy companies were typically somewhere between the two. We increased allocations to all aspects of the energy complex. The only energy subsector that we do not favor is natural gas. Gas fell again, down 17.7% this quarter and down 31.8% for the year. There is very little natural gas exposure in the Portfolio.

While most base metal prices were down in the quarter, copper actually rose 9%. This reinforces the fact that all metals are not the same. The supply constraints are very different, even if demand has similar economic variables underlying it. Base metals companies generally had strong performance, regardless of the metal.

Portfolio Review. Energy servicing and drilling, diversified chemicals and copper stocks (the latter had significant merger activity) were the biggest contributors to performance. Gold mining, oil shipping and steel companies were the only detractors. Chemicals, energy drilling and related services are the largest allocations in the Portfolio, over 15% each. While agriculture is likely to be a long term theme for the Portfolio, we reduced agrichemicals. Agriculture is now less than 10% of the Portfolio, its smallest weighting in years. We continue to hold diversified chemical companies, which benefit from lower natural gas prices. The allocation to US stocks remains high, approximately 65%. This reflects our cautious view on European stocks, concern with the political unrest in Russia and a constructive view on the US dollar.

Outlook. We enter 2012 with a mixture of relief that one of the most difficult years in market history is over and a sense of guarded optimism. For several months there has been anecdotal evidence of an improving global economy; evidence only now being supported by statistics. The basic dynamics of the commodity markets have not changed. The world not only needs a greater supply of most commodities, but also more confidence in the economic and political stability at their source. That can only mean more drilling, mining and new agricultural technology to meet this demand. The companies in our Portfolio are the ones that we believe are best positioned to benefit from this long term trend.