Fund manager profile of James Barstow from the Aurora Investment Trust
James Barstow, the manager of the Aurora Investment Trust, calls himself a fisherman by nature and he has been fishing in Chinese waters.
He is betting on West China’s low wages, the Chinese mobile phone sector, and the country’s demand for commodities.
His strategy has clear lessons for IR teams who want to sell their equities and bonds to investors who are sceptical about companies with exposure to commodities.
You have a heavy weighting in China-related equities. Do you have any concerns about growth and access to credit in China?
I’m aware of the issues, but I’m happy with my holdings. For example, I have invested 29.2 percent of the portfolio in mining companies.
After all, China consumes about 40 percent of the world’s copper, Europe about 12 percent. If Europe’s economies slow down by 2 percent, that is not very significant for the mining companies.
What’s your strongest lesson for IR executives at commodity companies?
We are still in the biggest ever commodity super-cycle. In other words, we are in an extended period when prices rise in real terms because the world’s dominant nations are industrialising at a more rapid rate than what the miners and other producers can cope with.
Regarding supply, we know that it’s getting harder and harder to find copper, and other commodities.
As for demand, emerging markets now have about 60 percent of the world’s population, so demand from their growing middle classes for commodities is strong and likely to grow.
So BHP Billiton, Xstrata and Rio Tinto are growth cyclicals, not just cyclicals.
Elsewhere, what’s the attraction of West China Cement, the building company?
For investor relations teams at similar companies, a lesson lies in the company’s listing on Hong Kong’s exchange and the cancellation of its quote on AIM [London’s Alternative Investment Market].
The share price rose by 110.5 percent in the year to the end of March, after local investors won the chance to invest in this growth company.
While the share price has fallen in the 12 months to early December, we sold 35 percent of our holding in the year when the stock more than doubled.
West China Cement is one of my 10 biggest holdings because it is a wonderful play on Chinese wage inflation.
Its location in the western region of the country enables it to pay wages which are half of the pay that workers command on the coast.
The more wages rise in the eastern regions, the more determined the government will be to alleviate bottlenecks.
The state will finance investment into infrastructure projects in the hinterland, so that companies locate there, pay their employees less, and can therefore price their exports more competitively.
West China Cement operates in the southern part of Shaanxi province, which lacks rivers and is generally upland, so that road transport is prohibitively expensive.
The state’s ban on the issue of further permits to build new capacity will help the company to maintain its current level of margins close to 40 percent.
Last year the company paid a maiden dividend, grew its profits by 90 percent, and raised its production capacity from 8.5 mn tonnes per year to 12.5 mn tonnes.
Which emerging companies are cheap because of contagion from scandals?
Asian Citrus, one of my ten biggest stocks, increased profits in the year to the end of June by 91 percent because of a rise in production as more trees became fruitful.
It increased sales to supermarkets, and grew prices by 9 percent. Its valuation is good, with a prospective price/earnings ratio of 3.9, and a yield also at 3.7 percent.
It has wrongly been tainted by scandals elsewhere, but the company can show its ownership of its orange groves
How does Emblaze, the software and mobile phone group, illustrate the Chinese theme?
It announced on 30 August that it had signed a licensing agreement with Huawei to embed technology on the global telecom company’s mobile devices.
More generally, it has plenty of cash, no significant debt problem, and its connections to the Israeli armed forces mean that it has wonderful technology, because so many good secrets come out of the country’s military services.
In the pharmaceuticals sector, why do you hold BTG?
Because it has five drugs which could each generate potential sales of $1 bn (£641 mn) per year. In addition, its new treatment for septicaemia seems to have even better potential.
What do you believe is a major source of political risk?
I contrast the Arab Spring with the revolutions in central and eastern Europe of 1989: there is nothing resembling velvet in this region of the Arab world.
There has been a tragic loss of human life in North Africa and the Middle East, and these events are certain to have far-reaching political and probably inflationary consequences.
