Strong commodity prices substantially boosted resource stocks last year.

According to UBS chief strategist David Cassidy, the resources sector achieved 59 per cent earnings growth in the latest reporting season. Compared with the rest of the market, which generated a meagre 2 per cent growth, the dichotomy between resources and other sectors continues to remain stark.

Losing China's connection

The resources boom has been closely linked to the China story. China's insatiable appetite for coal and iron ore has buoyed resource companies. Australia's small resource companies have also benefited from the China story. In fact, the S&P/ASX Small Resources Index rose a whopping 19 per cent in the final three months of last year, up 30 per cent for the whole year.

However, emerging inflationary pressures, particularly food prices in China, have raised concerns about growth sustainability in the region.

At a media briefing a month ago, Schroder Investment Management signalled the Chinese economy was showing signs of overheating.

Such risks will eventually play out in the resources sector.

"The main issues I have at the moment is that a lot of good news is already priced in resource stocks and commodities. Resource companies are also dependent on China continuing to grow and demand for commodities to remain strong," Schroder head of fixed income and multi-asset Simon Doyle said.

"If China's were to slow down more than it has, this could impact on the real and perceived demand for commodities, which could have significant consequences for commodities and resources."

Schroders head of Australian equities Martin Conlon was more pointed, saying the current scenario playing out between coal and iron ore producers was unsustainable.

"Iron ore and coal producers are currently making egregious profits selling raw materials to steel producers making no money, who in turn sell steel to automobile producers making no money and property developers building vacant buildings; hardly a balanced and sustainable system," Conlon said. 

Where value managers tread

For some fund managers, resource companies are not a big part of their investment universe, even during boom times.

Morningstar research analyst Tim Wong said value fund managers, such as Investors Mutual, Maple-Brown Abbott and Lazard Asset Management, were not as willing to invest in the resources sector because of their investment approach.

"Value managers tend to take a contrarian view on the resources sector because of their investment processes," Wong said.

This investment approach concentrates on finding companies that provide sustainable value, high dividends and stable cash flows.

As the value of resource stocks is linked to commodity prices, many value managers say their strict valuation processes preclude them from predicting commodity prices.

Investors Mutual has never favoured the resources sector. The firm's focus is on companies that have a competitive advantage with sustainable earnings and strong management.

The Investors Mututal Australian Shares Fund includes a mix of large and small caps skewed towards sectors like consumer discretionary and industrials and away from cyclical sectors such as resources.

While BHP is one of its top 10 holdings, the manager is 11.5 per cent underweight in materials.

"A lot of people tend to be very excited about the resources sector. When investors get excited about a thing, that signals to us that we must remain cautious and tread carefully," Investors Mutual investment director Anton Tagliaferro said.

Tagliaferro also pointed to China's inflationary concerns, which could force the country's government to slow its growth levels. This would of course have consequences for the record high commodity prices.

Any fall in demand for commodities in emerging markets would not be counteracted by demand from developed countries as growth would remain subdued in those regions, according to Tagliaferro.

As Invesco's head of the small companies equities team, Cynthia Jenkins said the fund manager focused on more sustainable business models, therefore mining and exploration were not favoured sectors.

"As value investors we want sustainable earnings. A significant portion of the resources market is exploration, which has no sustainable earnings but requires constant capital raising," Jenkins said.

Risk is also heighted in the small companies sector because these companies do not have the broader earnings base of larger companies.

Therefore, Jenkins said, business sustainability was even more crucial.

"We are interested only in companies with a track record of delivering on growth expectations and a clear income stream," she said.

"The risk offered by small-cap stocks that don't meet these criteria is too high for their potential returns. Because we can't justify exposing your investors' funds, we avoid companies in the small resources sector like speculative miners."

So what sectors are these value managers favouring at the moment?

Invesco's small companies fund is currently overweight in the non-mining materials sector and favoured stocks including Adelaide Brighton, Nufarm and Dulux.

Investors Mutual prefers companies such as Metcash, which pay healthy dividends, and steadily growing companies, such as Woolworths and APA Group.

As value investors, these fund managers risk lagging the markets during momentum-led environments, particularly during spectacular resource bull runs.

As Tagliaferro said, it was all about sticking to your discipline during these times as market cycles would eventually return to favour value investing.