Wealth Professional spoke to Next Edge Capital about their new Strategic Metals and Commodities fund
This article was produced in partnership with Next Edge Capital.
“This is an under-invested sector in most people's investment portfolios,” says Robert Anton, President and one of the Founders of Next Edge Capital, when reflecting on the organization’s new fund. “It's an area ripe with inefficiencies, and [by finding] a specialist that really, really understands the space, there's a vast opportunity to make money both long and short.”
The fund itself? Next Edge’s Strategic Metals and Commodities Fund – an opportunity that invests in companies from the commodity and natural resource industry, as well as those which benefit from technological innovation affecting the materials sector.
“My background and expertise lies in global, cyclical equities,” adds Matt Zabloski, PM & founder of Delbrook Capital, subadvisors to the fund. “And that's what we've focused on here – specifically the global materials, and commodity sector.”
So – why did Anton and Zabloski feel that the time was right to launch such a fund?
One of the reasons, they reveal, is that it feels like a natural response to underinvestment in the sector.
“We had a supercycle for commodities that that burst circa 2007 with the financial crisis,” Zabloski remembers. “[Following that], generally, the commodity sector was at best average, probably an underperformer. Most institutions just didn't have the internal resources to evaluate the sector. And they didn't really need to, because the commodity space wasn't really going anywhere.”
“That has created a situation now where a decade of underinvestment in the sector – or lack of representation in portfolios – has put us in a position where we're now short on specific commodities. Portfolio management companies don’t have the expertise to actually evaluate these opportunities. So, in some ways, a perfect storm has been set up.”
Another driving factor at play – and also something that has grown more impactful over the years – is the issue of supply constraints.
After a decade where little money has been spent replacing depleted reserves, scarcity is inevitably affecting the market. Zabloski uses copper as a good example.
“If we look at the average grade within a copper deposit in South America,” he explains, “you're looking at, in some cases, 50% below the grade you had 20 years ago. So, although you're moving the same ton of rock out of the ground, you're getting half the copper back. It doesn't take a PhD in economics to understand that the market comes into balance with a higher price. Apply things like cost inflation – which we've seen through things like diesel prices going up – and we’re going to see higher and higher commodity prices.”
These conditions are all based on the aftereffects of the past. Yet the overall ethos of the fund has equally as much to do with progression and innovation – and looking towards the future.
Green energy, sustainability and technological initiatives will all be having greater impact on infrastructure spending, demand and the sector in general.
This, Zabloski says, opens up a wealth of opportunities.
“[We asked ourselves] how do we go about putting capital to work most efficiently in areas with great growth potential,” he explains. “You can not only play off technological adoption, and what that means for things like revenue growth … but you can also play on the upside from some of the commodity cycles as they mature.”
“For example, we need a greater consumption of commodities for things like electric vehicles. It's one thing to say: we’re going to have 20% market penetration for electric vehicles – but we’ve got to make sure that we have the [working] infrastructure to distribute electricity more efficiently. These are demand drivers. There's the initial adoption of the technology, but then the infrastructure that has to go behind it to make it work.”
It’s this particular approach – dealing with the impact of the past decade while keeping a careful eye on the future – that makes the fund such an attractive proposition.
“Our clients are realizing the difference between a generalist trying to navigate this area versus a specialist,” Anton says. “We think that is quite key to our value-added proposition.”
“We’re definitely in the early innings as far as the opportunities for this fundgoes. Although Delbrook already had quite a lot of success managing other fund mandates in this sector – we think there’s a pretty long runway for investing in this area.”
Robert Anton is the President and Founder of Next Edge Capital. Matt Zabloski is PM & founder of Debrook Capital.