To navigate the challenges and cyclical nature of the resource sector, RBC portfolio manager Brahm Spilfogel uses a strategic investment approach that smooths out volatility. Predicting swings in commodity prices is not part of the process.
“When we look at this really big universe, we aren’t trying to guess where the commodity prices are going to go in the future,” says Spilfogel, vice-president and senior portfolio manager of Canadian Global equities at RBC Global Asset Management in Toronto. “We’re always trying to find companies that can grow either their cash flows or their resources in a flat commodity environment.”
Over the course of a cycle, whether oil prices rise or fall, the focus is on being in the top half of the industry in terms of above-average returns on invested capital. According to Spilfogel, those companies tend to do better over a longer period of time.
Spilfogel and co-manager Chris Beer manage the gold-rated RBC Global Resources fund. They draw on the expertise of their team of four, as well as other portfolio managers involved in energy on other RBC mandates. Several of Spilfogel's funds are gold-rated.
Over the last three to five years, the portfolio of around 58 holdings has transitioned out of Canada and concentrated on more of the “super majors” in the oil and gas and mining space. Following the decline of 2015, the super majors started to cut costs and focus on the best projects to capture the highest returns on invested capital.
“We’ve been on this path where return on invested capital has been improving every year and that should continue for the next three to five years,” says Spilfogel.
The current top two holdings, integrated oil and gas companies, Royal Dutch Shell PLC (RYDBF), based in the Netherlands, and Total SA (TTFNF), based in France, illustrate this investment approach. “The projects that Shell and Total are putting together now,” says Spilfogel, “will grow their production, not in a huge way, but it will certainly improve their returns that they’re getting for their shareholders in the future.”
This move towards bigger, more upscale companies includes BHP Group PLC (BBL), a leading global diversified mining company, and Rio Tinto PLC (RIO), an exploration and mineral mining company, both UK-based, and also in the top 10 holdings. “The bigger companies have better projects and the ability to cut costs. BHP and Rio Tinto are generating higher return on invested capital than they were a decade ago,” he points out.
All of these companies have much improved balance sheets, and pay a solid dividend, “like high dividend yields over 4%,” says Spilfogel. In addition, the valuations are reasonable with decent free cash flow and good capital discipline. This is why Spilfogel has been transitioning away from the small and mid-cap space like in exploration or development projects.
Geographically, the fund has held an approximate weighting of 50% in the U.S., 20% in the UK, 15% in Canada, and the remaining positions around the world over the last two or three years.
In positioning the fund, the investment team is cognizant of challenges, including a global slowdown, driven by concerns over Chinese/U.S. trade wars, and worries over a recession.
“We had the cyclical correction late in 2018,” says Spilfogel, “and we are in this uncomfortable position where I don’t think the world is going to get a lot better in the near term. But I’m not sure we’re going to go into a recession. There is a 30% to 40% chance over the next two years.”
In the case of a recession, the investment managers have target prices where they think the companies are reflecting a recession. In that scenario, they would begin to add aggressively to the portfolio to take advantage of the next economic expansion, says Spilfogel.
Looking ahead, the mandate will give investors more exposure in the area of electric vehicles. According to Spilfogel, the transition to electrification in the transportation industry will create a lot of opportunities in energy and materials.
For example, the transition includes the production and delivery of energy and the production of metals for those cars. “Electric vehicles are very copper intensive,” says Spilfogel, “so this fund, over the next decade and a half, is going to give you exposure to that thematic. There’s not enough copper in the world to run these cars, so we’ll be in that business of financing the projects to do that.”
“I think this mandate is suited for somebody that wants exposure to energy and materials and a little bit of hedge protection. And somebody that is of the view that the world is going to grow over the next couple of decades,” he says.
