For better or for worse, commodities are back in the headlines. The gold price has moved another leg higher this year, oil and copper have also been on the rise, and lately even one of 2024’s laggards – iron ore – has started to see prices tick back up.
Both gold and oil have seen prices drop back in recent days as geopolitical concerns ease, but as ever there are plenty of arguments to be made, in the short and long term, about how prices might move from here. Putting the intricacies of supply and demand dynamics aside, investors may well be interested in the signs of life being displayed by the asset class, what with inflation proving stickier than expected in the US and the UK, and growth less weak than some feared. That then raises the question of how commodity funds shape up, and where they are focused.
The generalists
There are plenty of well-established generalist commodity funds, and the investment trusts here do offer some value courtesy of their share price discounts. However not all are as cheap as some might have hoped. BlackRock World Mining (BRWM) recently traded on a share price discount to net asset value (NAV) of 5.5 per cent, having been as high as 10 per cent over the past year.
The shares do trade on a dividend yield of around 5.9 per cent, although the trust has posed some trouble for income hunters in recent times. Its revenue return per share for 2023 came to 33.95p, a 16.6 per cent drop from a year earlier. That backdrop saw the trust cut its dividend by 16.3 per cent, which was at least less painful than the 25 per cent reduction predicted by Stifel analysts earlier this year.
The fund is relatively concentrated in some respects, with nearly a tenth of the portfolio tied up in an allocation to BHP (BHP), a similar amount in Vale (BR:VALE3), 7.4 per cent in Rio Tinto (RIO) and 6.9 per cent in Glencore (GLEN). It is nevertheless well spread out in terms of its exposure to different metals, with 22.9 per cent of the fund in copper producers at the end of February, 13 per cent in gold, 9.9 per cent in steel, and smaller allocations to the likes of industrial metals, aluminium and iron ore.
This diversification, among other factors, is a reason why Mick Gilligan, head of managed portfolios at Killik & Co, remains a fan of the trust. “My preferred play in the trust space is BlackRock World Mining given its diversification across a wide range of underlying commodities and its scale, which provide competitive costs, scope to buy back shares and liquidity,” he says. “Notably this is the only resource trust [with a] greater than £250mn market cap.” As we have discussed at length, smaller trusts are finding it increasingly difficult to survive, and are much more likely to disappear via a wind-down or a merger.
Turning to the open-ended space, Charles Stanley chief analyst Rob Morgan is a fan of the L&G Multi-Strategy Enhanced Commodities ETF (ENCG). “The starting point for this product is to take the well-known broad Bloomberg Commodity Index, then increase the weights of the 10 commodities that exhibit the highest ‘backwardation’ level to extract value from the shape of the futures curve,” he says.
“Futures contracts need to be ‘rolled’ prior to maturity to maintain exposure and to avoid physical delivery of the underlying commodity, so unless investors are careful, this process represents a drag on returns to many futures-based [exchange-traded funds] where there is ‘contango’ – in other words the futures price of a commodity is higher than the expected spot price of the contract at maturity. This product seeks to avoid, or at least minimise, this effect for investors who are more interested in holding for long periods than shorter-term trading.”
When it comes to metals more specifically, Morgan makes the case for WS Amati Strategic Metals (GB00BMD8NV62).
“It’s a small and relatively new fund that takes an active approach to investing in the mining sector, aiming to hold an optimal combination of precious, specialty and base metals at any given time,” he says.
“It holds a concentrated portfolio of 35 to 45 companies, including higher-risk smaller stocks, so the individual selection by its managers will have a significant bearing on returns. It also adopts a ‘clean trade’ approach, avoiding companies that support oppressive regimes.” The team also seeks to focus on the transition to cleaner energy by backing some companies producing the industrial metals required.
Schroder ISF Global Energy (LU0355356758) is one other option, and a fund that could offer something to a portfolio at times when oil and gas prices are high. The Schroders fund has a good level of diversification, with a focus on North American gas producers, global oil companies, global oilfield service companies and low-cost oil producers. The team also favours companies with strong balance sheets and cash generation to mitigate some of the risk involved in such a cyclical space – although this risk is to an extent unavoidable.
Volatility in the commodities sector in general is always worth bearing in mind, with Gilligan pointing out that the MSCI World Metals and Mining index has experienced four huge declines from peak to trough over a 10-year period, ranging from falls of 20 per cent to 64 per cent. Rallies from said declines can also be huge, ranging from 31 per cent to 152 per cent.
Funds operating in the space can also find themselves exposed to geopolitical problems and stock-specific issues. BlackRock World Mining, for one, warned in its last financial report that First Quantum Minerals (CA:FM) had struggled thanks to the fact that Panama’s government had “enforced the closure of the company’s largest asset due to a populist agenda”.
Investors should keep in mind that they can get exposure to sectors such as mining via funds that are not solely focused on the commodities complex, which should limit the risks involved.
“Investors that want to get exposure to miners and energy but don’t like the idea of a pure-play resource trust could consider Temple Bar (TMPL) with a 27 per cent exposure to these sectors, JPMorgan Claverhouse (JCH) (21 per cent) or BlackRock Frontiers (BRFI) (21 per cent),” Gilligan adds. Temple Bar recently saw its shares trade on a 7.4 per cent discount to NAV and a 3.8 per cent dividend yield, while JPMorgan Claverhouse was on a 4.6 per cent discount and a 5 per cent dividend yield. BRFI, which fishes in a riskier and more niche area, recently traded on a 9 per cent discount and a 4.3 per cent dividend yield.
Niche trades
More targeted plays available for the more daring or tactical investor include the likes of uranium play Geiger Counter (GCL). However it’s likely that when considering an individual commodity investors will still think first and foremost of gold, given its status as a safe haven asset.
Gold’s recent rise has unsurprisingly been well captured by ETFs: the Invesco Physical Gold ETC (SGLD) is up by around 20 per cent in sterling terms over the 12 months to 22 April. However those funds that hold shares in gold miners have seen much prosaic returns, with Ruffer Gold (GB00B8510Q93) up by around 6 per cent and the VanEck Gold Miners ETF (GDX) sitting on a gain of around 2 per cent over the same period.
Like BlackRock World Mining, such funds will be exposed to stock-specific risks and geopolitical challenges, as well as the ups and downs of market sentiment. That said, funds that buy gold miners’ shares have on occasion posted huge returns: typically in periods where the gold price has risen and the wider stock market has simultaneously remain buoyant, as happened in the final three quarters of 2020.
