The price of defensive equities has risen substantially in recent months, which has meant a number of bargain-hunting investors have turned to the more cyclical areas of the market such as the battered mining sector for value. It is certainly a contrarian approach: according to FE Analytics the FTSE All Share Mining index has lost 17.96 per cent year-to-date, while the more general FTSE All Share has returned 11.21 per cent.
Performance of indices year-to-date
Source: FE Analytics
However, Percy, manager of the five crown-rated CF JOHIM Portfolio, says because demand from China will continue to be low, he feels the rewards of investing the sector do not compensate for the risks.
"We are persistently seeing disappointing data coming out of China, which means that you shouldn’t be too heavily weighted in commodities stocks," he said. "We don’t have a massive weighting in the sector, we just have the two holdings: Rio Tinto and BHP Billiton."
The slowdown in the Chinese economy has continued to frustrate investors and ING Investments’ Maarten-Jan Bakkum and Schroders' Keith Wade recently told FE Trustnet they expect this trend to continue.
Percy says that the supply/demand dynamic for commodities such as iron ore has swung against the mining sector due to the slowdown in the Chinese economy. However, he feels one of the major headwinds for investors in the sector is the management teams themselves.
"There is no doubt that Chinese growth is morphing from an export-led economy to a domestic consumer orientated one," he said.
"As well as the lack of iron ore imports from China, the big question facing these companies is how the management teams will stop themselves from destroying shareholder relations."
"They now all have new management teams who say they are no longer going to splurge cash on homegrown mines, or worse, big acquisitions of other businesses. For instance, when Rio Tinto bought Alcan it wrote off billions."
Despite his concerns over the sector, Percy will continue to hold his two mining stocks for diversification purposes. However, they only make up a small part of his portfolio.
"Both stocks have a dividend yield of above 4 per cent and we believe that to be sustainable. While we will continue to hold them, we won’t be looking to materially increase exposure either," he said.
"I always feel you are being a bit wet if a large company only makes up less than 2 per cent of your portfolio, as it is a bit half-hearted, however the trouble with mining stocks is that it is a very difficult call to make."
"However, I definitely can’t see myself ever investing in smaller mining companies in this fund as they are just too speculative," he added.
Percy has managed the £55m CF JOHIM Portfolio since November 2009.
Over that time, the fund has been a top-quartile performer in the IMA Flexible Investment sector, with returns of 42.67 per cent. Its benchmark – the FTSE APCIMS Stock Market Growth Index – has returned 39 per cent in this time.
Performance of fund vs sector and index since Nov 2009
Source: FE Analytics
The fund has also been less volatile than the sector and the index.
CF JOHIM Portfolio is a mixed-asset fund that holds direct shares and collective investment vehicles. However, as he recently told FE Trustnet, he tends to use other funds run by JOHIM.
The fund’s three largest equity positions are in the UK, North America and Europe ex UK, which make up 36.71 per cent, 15.53 per cent and 12.39 per cent of his total assets under management.
Percy also holds 6 per cent in fixed income; however he only uses two in-house funds – Waverton Global Bond and JOHIM Sterling Bond – for exposure to this asset class, as he is not positive about the sector and does not want the punitive double charges of using external portfolios.
Nevertheless, the manager is optimistic over the broader equity market and says he is not overly concerned about the chances of the world’s central banks stepping away from their market stimulus packages.
"Money from the central banks is going to continue to flow into the market," he said.
"The American economy is approaching self-sustainable recovery as the housing market and the banks are being fixed, plus unemployment and the fiscal deficit are falling lower than was first believed possible."
"There is always going to be the threat that the QE tap may be turned off too early, but Bernanke and the Fed will want markets to get used to the idea."
"In 1994, they raised interest rates too high and it caused both bonds and equities to crash and they won’t want to cause an issue like that again," he added.
CF JOHIM Portfolio has an ongoing charges figure (OCF) of 1.35 per cent and requires a minimum investment of £50,000.
