The Hedgeweek Interview: David Baker, Founder, Baker Steel Capital Managers LLP: "Well-positioned for consolidation in gold and mining sectors"

David Baker highlights the investment ideas that are driving the performance of Baker Steel's Genus Natural Resources Fund.

David Baker is a fund manager and, together with Trevor Steel, founded Baker Steel Capital Managers LLP in 2001. Until November 2001, he was a senior portfolio manager at Merrill Lynch Investment Managers (MLIM) specialising in the Natural Resources sector. Mr Baker initially worked as a Metallurgist on the lead/zinc mines of CRA in Broken Hill, Australia, then as a Mining Analyst with a regional broker in Sydney before moving to the mining desk of James Capel in London. In 1992, he moved to Mercury Asset Management (MAM), MLIM's predecessor, and helped to create a specialist team which at its peak managed over US$2.5 billion of Natural Resource assets encompassing several award-winning funds. He moved in 1994 to carry out the same functions from MAM's office in Sydney, Australia. David has a degree in mineral processing from the University of Birmingham and a Masters in mineral production management from Imperial College, London.

Baker Steel Capital Managers LLP is a specialist natural resources asset management and advisory firm with assets under management of over US$500 million, operating from its head office in London and its branch office in Sydney. It has an experienced team of 6 analysts and fund managers covering the precious metals, base metals and minerals and energy sectors worldwide, both in commodity equities and the commodities themselves.

HW: What is the background to the fund?

DB: Genus Natural Resources Fund, launched June 2002. The principals of Baker Steel Capital Managers, the Investment Manager, are David Baker, Trevor Steel and Tim Darvall. The fund managers are David Baker, Trevor Steel, Steven Miller, (fund manager primarily responsible for the energy sector) and James Withall (assistant fund manager). Fund AUM was USD 118m at 1 Feb 2006.

The fund is a long/short hedge fund playing opportunities within the natural resources sector where we see the need for considerable investment to meet the demand generated by a growing world economy. The Fund often plays directly in the underlying commodities but our main focus is the equities of companies who produce the natural resources (energy, base metal and precious metal sectors).

HW: How and where do you distribute the fund? What is your current and targeted client base?

DB: Principally distributed in Europe and Asia through recommendations and our own network of contacts. The current client base is Family Offices, Funds of Funds, Private Banks and Wealth Managers and we aim to attract more of the same.

HW: What is the investment process of your fund?

DB: Bottom up, we are principally stock pickers. We have a detailed process that we have refined over many years as fund managers. Our approach in gathering information ranges from 'kicking the tyres' by visiting operations around the world to company meetings and using company and broker reports. This information is fed into our proprietary database which allows us to compare relative value of mines and oil fields around the world at current prices against our long term price assumptions. This then forms the basis of our valuation: we like buying cheap, undervalued companies but also look for triggers or 'catalysts' for this value to be recognised by the market. However, we also identify pricing anomalies which can provide pair trade opportunities.

HW: How do you generate ideas for your fund?

DB: Company meetings/site visits, company reports and often price movements but understanding that we are primarily value managers looking for good value.

HW: What is your approach to managing risk?

DB: We have a balanced view of managing risk, appreciating that we are being paid to take on some risk to generate our returns. We have operating guidelines for the Fund which we monitor and ensure that we remain within our given risk tolerances. We have recently enhanced our VAR model which, accepting that the commodity sector is highly volatile, breaks down the contribution to VAR by individual stock and allows us to measure and understand where we are taking risks.

HW: How/against what do you benchmark the performance of your fund?

DB: As an absolute performance fund, we aim to return an average of 15% per annum. This is more important than comparing returns against our peers in the sector although we would like to be in the top quartile in terms of performance.

HW: Has your performance been as per budget and expectations? Do you expect your performance or style to change going forward?

DB: Performance last year was satisfactory, the second half was very strong following enhancements to our approach to risk and concentration of positions in the Fund.

HW: What opportunities are you looking at right now?

DB: Commodities are taking a well-earned rest, in what we consider is a strong secular cycle that has further to run. We like the oil and gas sector and the gold sector looks very appealing, where we see the potential for consolidation amongst the producers.

HW: What events do you expect to see in your sector in the year ahead?

DB: More consolidation but some volatility. Question marks over the US economy later in the year could impact the outlook for some commodities, particularly the base metals. We are seeing more valuation anomalies in our sector as generalist investors are getting more involved; this can provide good shorting opportunities.

HW: How will these changes/future events impact on your own portfolio?

DB: We are well-positioned to take advantage of any consolidation in the gold and mining sector and we have some strong positions in the oil and gas side. Our challenge will be to manage the net exposure through that volatility.

HW: What differentiates you from other managers in your sector?

DB: With over 60 years of experience across the investment team, we have in addition to experience, the depth of knowledge, first class internal research and the strength of technical backgrounds.

HW: Do you have any plans for similar/other product launches in the near future?

DB: We are just about to launch the Genus Energy Fund, a long short fund that will concentrate on developments in the energy sector. We have an excellent track record with the energy component of Genus Natural Resources Fund and now we will offer this through a dedicated sector fund.

(David Baker was interviewed on 22 February 2006)

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