Is the resources bubble about to pop?

Investors need to be careful that the resource boom in Australia doesn’t turn into a bubble like the tech wreck of 2000.

Thursday, July 13th 2006, 5:43AM

by Philip Macalister

Resource stocks have skyrocketed in value over recent years, with 100% gains in the two years not unheard of and double that over four years.

Pengana Emerging Companies portfolio manager Steve Black says huge expectations have been built into share prices, and there is a high probability they won’t be met.

“It’s like the tech bubble of 2000. People over reacted and priced too much in (to share prices).”

Black is careful to qualify his comments, by saying that they are a warning and not a prediction of a crash.

Pengana invests only in industrial companies in Australia and New Zealand, it doesn’t research or buy resource stocks, as it views the sector as quite different to industrial stocks.

“We don’t truly understand them,” he says. “It takes a different skill set to value resource companies. We will stick to our more boring industrial companies.”

He says because of the lack of resource stocks the Emerging Companies Fund is quite defensive in nature.

This is illustrated by the average price/earnings ratio of the portfolio being 13.6x compared to 15.5x for the small company index used as a benchmark.

“In down markets we have tended to find we do better than up markets,” Black says.

In the three months ending June 30, when the ASX market was soft, the Pengana fund did well, he says.

Pengana is modelled on the JB Were Emerging Leaders trust which was closed some years ago.

Black says the new fund has around A$82 million under management and a good chunk of that money has come from New Zealand.

It recently received an A rating from research house van Eyk in Australia.

Black says at some stage the fund will be capped. It will start with a soft cap where only advisers who previously supported it will be able to use the fund before a final cap.

The cap will be set as the fund being a certain percent of its relevant benchmark. When the fund started the cap would have been around the A$300 million mark, but now it is closer to A$500 million.

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