Q: The commodities sector has had a great run for the past two years. Does this mean we are in a commodity bubble or is the sector fairly valued? Do you have trouble finding stocks to invest new money in at the moment?A: It is certainly the case that commodities have had a fantastic run in recent times. However, there is a marked difference between what we have seen in these markets recently and what took place in technology and telecom sectors five years ago. In contrast to the stockmarket bubble of the late 1990s, many of the companies that benefit most from today’s developments, and certainly all those we hold in the fund, are profitable, proven businesses with real, tangible assets and fantastic brands. Five years ago, the companies that soared to unrealistic levels – and then disappeared completely – generally had no assets, no track records and no profits. Q: Your fund has performed well for the past two years. What can investors expect over the next two years? A: As world economies grow, they need basic “building blocks” to feed their expansion and M&G Global Basics seeks to hold the companies that are most strongly positioned to benefit from this scenario. This means looking for companies that have tangible assets and strong brands, and are well recognised and appreciated, either by the consumer or within their respective industries. I firmly believe in the global growth story, not least because of the rapid industrialisation of China and the emerging economies. Q: Is the environment for commodities still positive? A: As well as the continued industrialisation of China, and the subsequent continued demand for commodities that this will produce, I believe that what I call the “Russian paradox” will help strengthen the case for many of the commodity stocks we hold. This trend started in the 1990s when Russian generals and oligarchs gained control of former state-owned natural resources and began “dumping” these assets on overseas markets in exchange for cash. This promptly left the country rather than being inwardly invested in mining infrastructure. By the end of the 1990s, Russia’s rich supplies had been depleted. The result is that Russia now contributes little or nothing to international supplies of many raw materials in which it was formerly rich, and, in some instances, it has become a net importer. Meanwhile, development of mining resources is a lower priority, with new investment focused on oil and gas. Given the length of time it takes to establish successful mining operations, we believe it will be many years before Russian mineral output becomes a key factor in global supply. This phenomenon, together with the high and rising demand from areas such as China and India, will provide enormous support for commodity prices for at least the remainder of the decade. Q: Are prospects for commodity prices and returns still reliant on Chinese demand remaining strong? A: We believe the industrialisation of China is a long-term structural theme that will continue for many years and drive sustained strong demand for a wide range of materials. This is evidenced by the commitment by governments to building infrastructure – last year, China and India committed to spending more than $500bn (£260bn) on physical infrastructure over the next decade, while China has stated it will build 150 new power stations over the coming three years. These spending commitments are being driven by a demographic shift as a largely agrarian population becomes urbanised. Given these factors, we remain positive on the outlook for the fund’s exposure to raw material stocks over both the short and longer term. Q: Which parts of commodities are you most positive about? A: We remain positive on the mining sector, especially areas most strongly needed by China, such as coal, iron ore, nickel, copper and platinum. Mining companies should also be boosted by ongoing consolidation and we expect to see a number of takeovers this year. This will be either by Western miners, as was the case last October with WMC Resources, or by Chinese companies seeking to secure their own supplies of raw materials by buying companies outside their borders. Equally, selected oil stocks should continue to do well. I take the view that despite the impressive performance we have seen recently, these compelling demand fundamentals and the strong cash generation demonstrated by the oil companies are still not reflected in their valuations by the market. Q: Which stocks do you hold that benefit from high commodity prices? A: Within M&G Global Basics, Australian metal recycling operation Sims Group and Brazilian iron ore miner Cia Vale do Rio Doce (CVRD) have seen huge gains on the back of unprecedented Chinese demand and remain attractively positioned. Diversified mining groups with operations in copper and nickel, such as Australia’s BHP Billiton and WMC Resources, have also benefited from this theme. WMC was further boosted by a bid approach from Swiss-based mining group Xstrata and ongoing counter-bid speculation. Q: What are the biggest risks to the sector’s continued success? A: As we saw in 2004, and as with any specialist area of the equity market, commodities may be subject to occasional bouts of volatility. When this happened last year, it was generally the result of short-term newsflow or the activities of speculative traders such as hedge funds. It was not driven by any change in the underlying long-term fundamentals of the companies or the structural themes on which we have formed our investment views. This was shown last year when sharp declines in April, and some volatility at the end of the year, were followed by strongly recovering share prices. This pattern could continue as commodity stocks follow their path of secular growth. The fund’s ability to invest across a broad range of basic industries that stand to benefit from global growth means Global Basics is not tied to the fortunes of a particular sector of the market. This diversification can play a key role in limiting risk. As a bottom-up stockpicker, I do not attempt to predict the direction of economic markets, but like all our fund managers, I am acutely aware of how the macroeconomic environment will impact the individual stocks in this fund. Q: Is it important to visit all the companies in which you invest? A: The most important part of my investment process is the company meeting. During 2004, I met the management of many of the fund’s existing holdings, as well as companies that I do not own, in America, Canada and Asia, and also closer to home across continental Europe and Britain. Graham French is a director of M&G Investment Management and part of the global specialist team. French, who joined M&G in 1989, manages the Global Basics, International Growth and Managed Growth funds. He graduated from Durham University in 1988 with an honours degree in geography.