Seeking Alpha

The GMO Resources Fund Class IV Is A Staunch Defender In The Natural Resources Sector

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Includes: GOVIX
by: Andre Waldron
Andre Waldron
Tech, robotics, fund holdings, Financial literacy
Summary

The fund's above-average performance was boosted by positive YTD returns in its top 25 holdings.

Based on its downside capture ratio, the fund has a history of performing at an above-average level in market downturns.

The fund has an expense ratio that is significantly lower than the category average.

The GMO Resources Fund Class IV (GOVIX) is the top ranking mutual fund in the struggling Morningstar natural resources category. As of Christmas Day, GOVIX has had a -9.56% return while the Morningstar natural resources category has a -22.74% return.

This was very interesting especially given the nature of the fund’s market capitalization. As you can see below, GOVIX has a significant advantage in terms of the riskier small-cap holdings as opposed to its benchmark and category advantage as well as a significant deficit in terms of the holdings in the giant-cap market capitalization.

Size

% of Portfolio

Benchmark

Category Average

Giant

12.84

26.12

24.27

Large

39.78

43.38

29.48

Medium

27.02

25.16

34.10

Small

17.85

5.28

11.77

Micro

2.51

0.06

0.38

Interestingly enough, GOVIX’s price-to earnings measures (price-to book, price-earnings, price-to sales, price-to cash flow) were at a deficit compared to the benchmark and category average. GOVIX has a P/E ratio of 8.34 compared to the benchmark P/E of 17.78 and industry average P/E of 15.32.

Investors will be very pleased with the funds’s dividend yield of 5.06. This total is more than double the average dividend yield of the category benchmark (2.31) and category average (2.22).

So the question remains: What are the main holdings in the portfolio that allows this fund to be much tougher than the rest? In order to answer this question, I analyzed the top 25 holdings and found holdings that packed the right amount of punch in terms of both portfolio weight and YTD Return. It should be noted that Rio Tinto PLC, the fund’s second best holding in terms of portfolio weight had a YTD return of 1.50%. However, the following holdings have definitely spearheaded the firm’s above-average results.

Holdings

Portfolio Weight

YTD Return

Anglo American PLC

3.57

17.18%

BradeSpar SA

3.39

12.83%

BHP Billiton PLC

3.01

13.36%

PJSC Lukoil ADR

2.50

31.91%

Vestas Wind Systems

2.03

18.99%

Gazprom Neft PJSC

1.82

46.05%

Austevoll Seafood ASA.

1.65

72.01%

Israel Chemicals Ltd

1.48

49.30%

Tatneft OAO ADR

1.27

32.78%

It also helps that only six of the fund’s top 25 holdings are in negative territory. It should be noted that there was only one small-cap holding in the top 25.

Thus, we must infer that the above-average small-cap weightings that the fund has must be in holdings with less portfolio weight. Fund holders will be pleased to know that the fund manager has had a good history of performing at an above-average level in down markets in recent years as well as holding their own in down markets. Given that we are in the midst of a potential bear market, investors will be pleased at the firm’s downside capture ratio.

Fund

Upside Capture Ratio – 1 Year

Downside Capture Ratio 1 -Year

Upside Capture Ratio – 3 Year

Downside Capture Ratio – 3 Year

GOVIX

130.16

86.79

128.64

51.42

Benchmark

79.70

127.91

92.91

124.84

GOVIX is cheaper than your average fund in this category. With a rate of 0.71, the firm’s expense ratio is more than half as much as the Morningstar Category Average.

In a potential bear market, you will need a fund that can be a staunch defender in market downturns. The fund’s above-average dividend yield and cheap expense ratio certainly does help its attractiveness.

GOVIX is certainly worth a look.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.