Small cap resource sector still attractive

Clive Donner

The head of a fund manager dealing in commodities believes investors can maximise the returns on investments from the commodities boom if they examine small cap companies in the sector for opportunities.

However, according to LinQ managing director Clive Donner, the fact that the small end of the sector does not respond to commodity price movements as the organisations at the large end do makes it difficult for investors to identify good return opportunities.

“The small end responds more to the quality of management and milestone achievements. Those things tend to move from a two to three time PE [price earnings ratio] to a 10 to 15 time PE as they pass through those various curves, and that is what makes the small end hard to figure out,” he explained.

Donner feels the beta capability of the small caps resources sector is quite high and investors can easily generate out-performance by including these stocks in their portfolios.

Furthermore, the strong performance of the sector looks set to continue.

“It’s a sector that’s been in vogue now for three or four years, there are no real signs of abatement, and demand is still there … With typical metals like copper, zinc and lead the supply side is terribly acute in shortage, and on the demand side you’ve still got raging economies, particularly in China and India,” Donner said.

The LinQ Resources fund specialises in this area of the market. The fund was listed in January 2005 and delivered a return of 28.8 per cent over the past year.