![Fund managers Ben Cleary and Craig Evans are behind Tribeca's $200 million resources fund.](/content/dam/images/g/t/t/v/u/1/image.related.afrArticleLead.620x350.gttsk2.png/1484728663846.jpg)
When China introduced its game-changing 276-day coal policy which lit a fire under prices in 2016, Tribeca fund managers Ben Cleary and Craig Evans were on a plane 48 hours later heading to Beijing, Shanxi, Hebei and Shandong to figure out the implications for the moribund coal market.
Coal had been in oversupply for five years but within days they formulated an investment strategy that would help fuel a 145 per cent return for their $200 million Tribeca Global Natural Resources Fund, after fees, for 2016. It took eight weeks for most banks to update their coal supply forecasts.
The fund managers say being nimble is a big advantage in resources where it doesn't pay "to buy and hold".
But this Tribeca fund is not a participant in Mercer's benchmark fund manager's survey.
![Top fund managers.](/content/dam/images/g/t/u/3/6/e/image.imgtype.afrArticleInline.620x0.png/1484727754011.png)
"We feel like there's lots of great resources investors but most of them have got the wrong strategy, most are constrained whether they're long-only, Aussie-only or equities-only. It really doesn't make any sense," says Cleary, "it's so volatile. You go on these site visits, for example to the Pilbara, and the majority of investors can't invest in the shipping company because it's listed in Japan, the engineering company because it's Korean, they can't short because they are long-only or they don't invest in the credit."
Their best contributors last year were long positions in Canadian zinc and copper producers – Trevali Mining, Nevsun Resources, Lundin Mining and Teck Resources – which helped deliver more than 10 per cent of alpha, and longs in oilfield services stocks such as ASX-listed WorleyParsons, Canada's Gibson Energy, and Texas-based Halliburton and Baker Hughes which together contributed more than 15 per cent.
Salmon consumption
In 2017, they are staying long oil services and are bullish on their salmon interests, as well as base metals, where many commodities face supply deficits.
"Salmon is one of the best consumption stories within the agri space we look at. All G20 countries are growing at double-digit consumption growth rates, and you've got the two biggest exporting nations, Norway and Chile, both with algal bloom and lice issues in the water," Cleary says. Tribeca owns salmon farmers in Australia, New Zealand and Norway.
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Cleary and Evans, who both used to work at Macquarie, predict deepening supply deficits in zinc and copper for 2017-18, a result of five years of under-investment they believe will spark a wave of takeover activity. Indeed, M&A; is a broader theme they believe will sweep through resources over the next 12 months. "Companies will have to buy growth," says Cleary. "Companies will also have to commit to new projects for the first time in many years." BHP just reached a final investment decision for its Mad Dog oil project, the first major oil project announced for more than 18 months, they note.
Reflecting on one of the most extraordinary years in commodities since the super-cycle peaked, the fund managers sensed in January of last year that the sector was set for a turn of fortunes. In 2015, 85 per cent of their fund's returns were derived from short bets.
"All the kerosene was there, you had the biggest hedge fund short position in the sector for 25 years, mutual fund ownership was the lowest for more than 50 years and valuations were quite reasonable. You just needed the match and the match came in the form of a 180-degree policy change in China", Cleary says. "Fewer people are focusing on the fact that we're almost five years into a chronic under-investment cycle.
Production growth
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"Whether it's in iron ore, whether it's copper, oil, it's really hard to find any major producers with meaningful production growth."
While the fund sees significant opportunities in long positions this year, Cleary and Evans' three best short ideas are diamonds, Asia liquefied natural gas, and fertiliser.
In diamonds, there is mounting competition from cheaper synthetics – "you can't tell the difference between a natural diamond and a lab-made diamond up to two carats" – and millennials are not interested in fine jewels. "They prefer playing computer games and going on holidays. An entire generation is not interested so there are structural demand issues there also." Inventories are at multi-decade highs, they note.
"We don't like Asian LNG, particularly Asia spot prices over the next 12 months," says Cleary. "China is re-selling contracted cargoes back in to the spot market and this will increase significantly." Tribeca sees spot prices falling from $US8 to $US2 as China dumps unwanted cargoes over the next five years.
They are also counting on discounting in ammonia, fuelling their bearish view on fertiliser. "We think there's an oversupply in the US and the weakening euro means European countries will be exporting cheap ammonia to the world. Disruption is happening in that sector in the form of drones, you can fly a 10,000 acre property in a day and know the moisture content in the soil," Cleary says. "That's decreasing fertiliser consumption by as much as 80 per cent."