Money manager Benoit Gervais knows that backing natural resources companies can be tricky these days, with investors seeing energy and materials producers as “big, dirty and cyclical industries” and flocking to more environmentally benign sectors.
Rather than joining the movement out of the sector, the senior vice-president of resources at Mackenzie Investments in Toronto looks for resource firms that are cleaning up their act.
“We’ve been saying, ‘I think that you want to go and address this with management. There’s going to be some cheap ways to reduce emissions and achieve societal goals,” says Mr. Gervais, who oversees $4-billion in assets, including the $220-million Mackenzie Global Resource Fund and the $350-million Mackenzie Precious Metals Fund. Both received 2021 Lipper Fund Awards.
The Global Resource Fund, with a management expense ratio of 1.06 per cent for the Series F class, has a one-year return of 66 per cent, a three-year return of 13.5 per cent and five-year return of 5 per cent, as of Oct. 29. Its top holdings by sector include oil and gas at 47 per cent, metals and mining at 20 per cent and 8 per cent each for paper and forest products and chemicals.
The Precious Metals Fund, which is 77 per cent gold and 7 per cent silver, lost 10.9 per cent over the past year and returned 28 per cent and 9.5 per cent over the past three and five years, respectively. It has an MER of 1.05 per cent for the Series F class.
Mr. Gervais, who began his career as an engineer working for a series of mining companies, heads Mackenzie’s resource team, which has grown to five members over the last few years. Meanwhile, competitors have left the space, feeling it’s “just too risky,” he says.
“On the surface, if you’re approaching this just by looking at the emissions, you’re saying, ‘We don’t want the emissions, it’s a risk, we want to be carbon-neutral or avoid carbon, so we’re not going to invest there.’”
His team suggests investors “team up with those companies to reduce emissions, rather than exclude them,” although Mr. Gervais recognizes that’s a challenge.
The Globe spoke to Mr. Gervais about opportunities for investors in the resource sector:
Where’s the incentive for resource companies to clean up?
In general, the cleaner version of whatever you’re trying to buy is not cheaper. So, what happens is that the clean version trades at a premium. Therefore, you have a choice as a company: Do I keep selling the dirty version? Or do I upgrade and retool to sell the clean version? And I think that the incentive structure is being slowly integrated into the pricing of stuff. If there is enough perceived longevity to that mechanism, then companies start investing.
What resource areas are particularly promising?
The aluminum that we sell in Canada is one of the cleanest [in the world]. Wood is another one. When you build a house, you have a choice to use more or less cement, and lumber is a carbon sink. And you can also sell natural gas as a bridge fuel, to replace coal.
What are some of the more interesting stocks in your resources fund?
For energy we have Tourmaline Oil Corp., one of the largest natural gas producers in America, if not the world. In our mind it’s one of the largest, best assets and has the best capital allocation in this space. And then we have West Fraser Timber on the materials side, which provides lumber and oriented strand board. It has a North American and European footprint with best-in-class mills and capital allocation. In mining we have a copper stock, First Quantum Minerals Ltd. Deleveraging over the next one-to-two years will lead to a rerating of this company. Of all mining companies, First Quantum is also one of the best mine-builders. And copper is critical. With the transition into renewables, we’re going to build lots of wind power and solar panels. You need a lot of wiring in those solar panels, in those windmills. It’s the same thing with electric cars.
It can’t be popular to push resource investments.
It is not a well-travelled route. Buying windmills and solar panels is very much in vogue. So we started documenting this idea that what you want to buy, essentially, is the improvers. Sure, you have this notion of carbon-less portfolios. That’s interesting, but there’s no guarantee of future return.
You’re saying that these companies are not going away anytime soon, so we should invest in them as they clean up?
Yes, hopefully. It’s going to take a little bit of work to convince people. [Our fund] has good numbers, but I think we need more than good numbers. I think we need a bit of a microphone, as we have a great story to tell.
This interview has been edited and condensed