Finding diamonds in the rough

A little known fund manager has produced one of best returns in the industry as they invested in to resources and fruit and vegetable fertilisers.

The Paragon Fund from Paragon Funds Management yielded 24.03 per cent year-on-year to June 2016, which made it the tenth best performing fund in Australia, according to Money Management's Investment Centre (MMIC).

The firm's co-managing director and investment manager, Nick Reddaway, said they invested in to lithium in 2013, which later became a bull market on the back of electric car demand.

Electrical vehicles were powered by lithium ion batteries, and that metal was experiencing strong underlying demand, restricted supply and backing from the US government (with funding and resources), Reddaway said.

In 2009, US President, Barack Obama wanted America to be less energy dependent and backed lithium ion battery technology. That's when Paragon did their homework.

"It went from US$2,000 a tonne to around US$20,000 in China. Contract prices are around $10,000 a tonne. And we've bottom up researched stocks that are producing at $2,500 to $3,000 a tonne. We are talking 300 per cent margins," Reddaway said.

They also invested in to sulphate of potash (SOP), a fertiliser used on fruit, vegetables and colourful flowers, and predicted to be the next big thing for investors in 2017, according to the firm.

Co-managing director and investment manager, John Deniz, said the firm picked 80 per cent of the portfolio's stocks based on themes.

"This year it has been largely lithium and Australian dollar gold. Last year it was mobile internet," he said.

"At the back end of last year we shifted quite dramatically out of industrials and in to resources. From a higher level that was a big driver of the performance this year," he said.

They didn't buy BHP, Rio, Woodside, but instead focused on investing in underlying resource subsectors, [such a gold and lithium], which offered strong fundamental upside, Deniz said.