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Investor All-Stars

Fund catches the momentum of surging materials stocks Add to ...

Listen to any argument in favour of investing in base metals producers and you'll probably hear China repeated over and over again.

China has a seemingly limitless demand for anything that can be extracted from the ground. The country's economy continues to grow at a blistering pace, recently overtaking Japan as the world's second-largest, and therefore its demand for commodities looks like a trend that is unlikely to reverse course any time soon.

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But for Richard Morin, co-founder and chief operating officer of Montreal-based Landry Morin Investment Managers, there is a more compelling reason to invest in base metals stocks: They are benefiting from exceptionally strong momentum.

Momentum is key to the stock selection strategy in his Landry Morin Canadian Momentum Fund, creating a highly concentrated portfolio of stocks that has no limits on sector exposure. The fund, formerly only available to accredited investors, is now open to anyone through a broker.

"We're trend followers," Mr. Morin said. "Stocks that have gone up the most over the past 12 months tend to continue on this upward trend."

Since the summer of 2009, this unusual approach has translated into a massive overweight position in materials stocks, a broad group that includes precious metals producers and fertilizer companies in addition to base metals producers. While materials account for about 23 per cent of the S&P/TSX composite index, the fund had a whopping 80-per-cent weighting in these stocks by the end of 2010.

"When the market started to believe that the recession was over and we would go back to a period of sustained economic growth worldwide, that's what supported the valuation of base metals stocks," Mr. Morin said.

Each month, the fund ranks the 100 largest stocks in the S&P/TSX composite index based on a proprietary measure of momentum, then picks the top names and starts unloading the stocks that no longer make the grade.

Right now, there are just 17 holdings, which is an exceptionally narrow selection for a mutual fund. The fund's top holding is copper producer First Quantum Minerals Ltd. which has an 11.1-per-cent weighting. Lundin Mining Corp. which produces copper, zinc and lead, also figures prominently, as does giant Teck Resources Ltd.

"The all-stars of the past two years are heavily represented in our portfolio and we've made a lot of money with them," Mr. Morin said.

According to Lipper, the fund's one-year return to the end of March, 2011, is 18.9 per cent, beating the 16-per-cent return for the average Canadian equity fund. The momentum fund has also beaten its peers - and the composite index - over the past three-year and five-year periods, which takes into account the devastating market downturn in 2008.

Despite the success of the fund, it is by Mr. Morin's own account not designed as a core holding for investors, given its lack of diversification and high volatility. When the market shifts direction, momentum plays can lose big in the near term.

Still, Mr. Morin stands by momentum as a money-making strategy.

"Investors generally are not entirely rational when they make buy and sell decisions," he said. "They sell their winners too quickly and they hold on to their losers for too long. That's irrational: Just because a stock has gone up a lot doesn't mean that it has become too expensive."

That's why base metals stocks have played a prominent role in the fund for nearly two years. But the nature of the fund - it takes no fundamental approach to the market - means that holdings can change quickly. First Quantum didn't even crack the fund's top 10 holdings at the end of 2010, but now sits at the very top of the list.

How long will base metals producers continue to dominate?

"For as long as the market believes that the economic expansion will be sustained, and China and emerging markets will continue to drive the demand for base metals, this trend will continue," Mr. Morin said.

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