Why aren't big fund managers buying Fortescue shares?

Miner and company person analysing results of a mining company.

Fortescue Ltd (ASX: FMG) shares are unquestionably one of the most well-known investments on the ASX today.

This is probably due to a combination of the ASX 200 iron ore giant’s famously massive share price gains between 2004 and 2008 (20,000%-plus). As well as the public profile of founder and chair Andrew ‘Twiggy’ Forrest, now one of the country’s most famous and prominent businesspeople and billionaires.

Over the past 20 years, Fortescue has evolved from an obscure penny stock to a proud ASX 20 blue chip. As a result, many Australian investors hold Fortescue shares in their stock portfolios today. These investors (to varying degrees) have been well rewarded too.

Even in recent years, Fortescue has delivered healthy share price gains, as well as some of the largest dividends the upper echelons of the ASX have ever seen. To illustrate the latter point, this is a company that went from paying an annual total of 23 cents per share in fully-franked dividends in 2018 to $3.58 per share over 2021.

Add that to Fortescue’s 250% share price growth over the past five years, and it’s not hard to see why this mining stock has a loyal group of retail shareholders.

Yet Fortescue reportedly has a popularity problem amongst larger investors and fund managers.

According to a report in the Australian Financial Review (AFR) today, out of the 30 top actively managed share funds in Australia, just one has disclosed a Fortescue position this year. That reportedly makes Fortescue “the least-held stock among the 10 largest companies on the ASX”.

The report also cites a JPMorgan fund manager survey, which ranked Fortescue as the “least loved” stock relative to its size on the ASX.

So why are the ASX’s most prominent investors rejecting Fortescue shares seemingly out of hand?

Why aren’t Fortescue shares making the cut for ASX experts?

The survey found that one concern over the quality of a Fortecue investment is ‘lower iron ore grades” relative to other big miners like BHP Group Ltd (ASX: BHP) and Rio Tinto Ltd (ASX: RIO).

In addition, many fundies apparently have taken issue with the company’s recent high management turnover, as well as Forrest’s relatively recent focus (and spending) on green hydrogen initiatives and other future-facing technologies.

The report also quotes a number of fund managers on their views of Fortescue. Milford Asset Management’s Jason Kururangi stated:

For some investors over the last couple of years, it’s just gone into the ‘too-hard basket… Most people tend to be more comfortable in BHP. You have a similar cost structure and a higher-grade product, which generally fares through the cycle – even if you sometimes get supercharged earnings from Fortescue, like we’ve seen in the last 12 months.

But not all ASX experts are pessimistic about Fortescue. Australian Eagle Asset Management’s Sean Sequeira told the report that Forrest’s unconventional management style has always alienated Australia’s professional investing class:

Andrew is the type of person who goes into areas and tries to execute new methods of doing things… That does result in the market finding it very difficult to see how these things will be pulled off because they haven’t seen them done before.

As we’ve seen with Commonwealth Bank of Australia (ASX: CBA) shares, it can be very difficult for ASX experts to pry ordinary investors away from a popular blue chip stock that has delivered for them in spades in the past.

Going forward, it will be interesting to see if these ASX experts are proven right in staying away from Fortescue shares.

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Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.