BHP, Rio Tinto or Fortescue? Future Fund Chief Faces Tough Choices

We have a question for you today. Which stock would you rather buy: BHP (ASX:BHP), Rio (ASX:RIO), or Fortescue (ASX:FMG)? With BHP you get iron ore, nickel, uranium and even some oil (BHP is also Australia’s second-largest gold producer)…and the chance that analysts will value it more richly than 10 times earnings. Rio gives you copper and iron ore and diversified international portfolio of properties. And Fortescue?

Well, here’s another question for you. Is Fortescue the next BHP? The company is pursuing lower grade iron ore deposits in the Pilbara. Stubbornly high iron ore prices make that pursuit sensible, according to Fortescue bulls. But energy and transportation costs could spoil the broth. What do you think?

We’re asking these questions this morning because we’ve tried to put ourselves in the position of David Neal, the British-born manager of the Future Fund. Neal has the unenviable task of investing AU$50 billion in public pension money into the market in order to cover an estimated AU$148 billion in liabilities by 2020. He’s got some time. And more importantly, he’s going to have even more money to work with as soaring tax revenues boost the value of the fund in coming years.

But investing AU$50 billion isn’t as easy it sounds. Is there anything good left to buy? After last week’s bond market volatility, you’d want to rethink the stability of fixed- income sovereign bond markets. Resources? Or just a market-tracking index fund?

The last might be the simplest strategy. After all, when you’re in a bull market, the easiest thing to do is “buy the market” and let the secular trend do your work for you. No need to be a hero or a Warren Buffett, is there?

Neal holds a degree in Electronic and Structural Materials Engineering from Oxford. He has no experience as a money manager, but we won’t hold that against him. There are plenty of financial professionals who do have experience as money mangers…and still do a lousy job. The key to strategic investing, we say as someone who edited a newsletter called Strategic Investment for five years, is to keep your eye on the bigger picture and keep the questions simple: who wins and who loses from the major trends?

Neal has said that “diversification is good.” Good luck finding it, Mr Neal. The whole world has one thing in common today…it’s a boom fuelled by cheap money. In that sense, it’s a great time to be managing AU$50 billion. But if you were hoping to find any undiscovered assets out there…or an asset class that provides Australia’s future pensioners with a surefire hedge against a global market bust, well, we wouldn’t want your job today.

Dan Denning
Markets and Money

What should David Neal invest in? Leave a comment below.

Dan Denning

Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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2 Comments on "BHP, Rio Tinto or Fortescue? Future Fund Chief Faces Tough Choices"

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Artical was great, but what is the answer???

Josh T

I’m with Phil – somebody with a bit of knowledge please respond – BHP, RIO or FMG?

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