Commodity funds look cheap, according to Oriel Securities, singling out City Natural Resources High Yield Trust (CYN) and BlackRock World Mining Trust (BRWM), both of which are IC Top 100 funds.
Both funds have delivered excellent long-term returns, but have suffered in the shorter term as commodity prices have fallen. CYN currently trades on a 20 per cent discount to its six-month discount range of 20-11 per cent. BRWM trades on a 15 per cent discount compared with its six-month discount range of 16-10 per cent.
Both funds have lost investors' money over 2011 and 2012 in terms of their share price. To invest you would have to be convinced that the long-term story for emerging markets' commodity demand is intact. Here, the argument is that both China and India have huge populations and that the cumulative total demand will be massive over the long term at the same time that supply is failing to meet demand.
BRWM is the more mainstream fund, with its experienced manager, Evy Hambro, having a bias towards large-caps and a preference for mature businesses that are in production over exploration and newer ventures. The trust has big holdings in mining giants Rio Tinto and BHP Billiton, which would raise duplication issues if you already hold them in your portfolio.
CYN has an extensively diversified portfolio of less well-known emerging markets miners. It invests in equity and debt securities of mostly quoted companies in the mining and natural resources sectors and supporting industries. Note that it has a large exposure to gold miners at 28 per cent of the portfolio.
CYN also has the higher gearing of the two trusts - at 122 per cent, compared with BRWM's 107 per cent.
Both funds carry significant risks and are only for investors seeking dedicated exposure to miners. In terms of charges, there is not much in it - both seem reasonable. According to the Association of Investment Companies, CYN has ongoing charges of 1.48 per cent, while BRWM is slightly cheaper at 1.31 per cent.
Of the two, we think CYN is the more interesting - although higher risk - play. Long-term holders of the trust are still sitting on impressive gains, but those unlucky enough to have bought more recently have had a torrid time. But the board and manager are upbeat about the outlook and valuations, with the trust having a higher level of gearing than its peers, at 122 per cent. Should we see a turn in commodity prices and an improvement in markets, this leverage will start working to investors' advantage.
Note that despite having the authority to allot up to 99.9 per cent or make market purchases of up to 14.99 per cent of issued share capital, CYN does not have an explicit discount maintenance policy and has not to date undertaken any repurchases of its shares. Over three and five years, the discount has averaged around the 15 per cent mark.
Annual Returns % (GBP)
2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | YTD* | ||
---|---|---|---|---|---|---|---|---|---|---|---|---|
City Natural Resources | Price | -25.93 | 96.88 | -0.17 | 21.38 | 57.69 | 38.92 | -58.18 | 147.66 | 85.16 | -28.16 | -15.25 |
NAV | - | - | 11.97 | 26.15 | 60.75 | 42.67 | -45.81 | 100.69 | 79.39 | -25.56 | -14.43 | |
BlackRock World Mining | Price | 40.21 | 67.11 | 1.51 | 62.98 | 27.18 | 48.96 | -61.13 | 121.98 | 48.63 | -21.55 | -8.82 |
NAV | 29.02 | 62.28 | 0.68 | 67.48 | 26.88 | 51.02 | -56.06 | 104.93 | 46.41 | -23.27 | -9.03 | |
MSCI Emerging Markets USD | -15.02 | 40.54 | 17.44 | 50.46 | 16.27 | 37.47 | -35.18 | 59.39 | 22.94 | -17.56 | 9.24 | |
HSBC Global Mining TR USD | -0.36 | 52.06 | 4.28 | 58.57 | 21.76 | 54.44 | -42.11 | 83.18 | 35.62 | -27 | -5.84 |
Source: Morningstar, *as at 29 November 2012
City Natural Resources High Yield Trust: Top 20 holdings (as at 31 October 2012)
Holding | % |
---|---|
REA Holdings | 3.8 |
New Britain Palmn Oil | 3.1 |
First Quantum Minerals | 2.1 |
Perseus Mining | 2 |
Sandfire resources | 1.9 |
Silver Wheaton | 1.9 |
Eldorado Gold | 1.8 |
Horizon Oil | 1.7 |
Coalspur Mines | 1.7 |
Detour Gold | 1.6 |
Great Western Minerals | 0.14 |
Norwegian Energy | 1.4 |
Wessex Exploration | 1.4 |
Fortuna Silver Mines | 1.4 |
Integra Mining | 1.3 |
Agnico-Eagle Mines | 1.3 |
Newstrike Capital | 1.3 |
Iluka Resources | 1.2 |
Resolute Mining | 1.2 |
Paladin Energy | 1.2 |
Sector breakdown (as at 31 October 2012)
Sector | % |
---|---|
Gold | 28.89 |
Oil & Gas | 23.03 |
Palm Oil | 8.24 |
Copper | 5.93 |
Alternative Investments | 5.41 |
Uranium | 5.27 |
Finance | 4.55 |
Silver | 4.39 |
Other Mining Investments | 4.08 |
Iron Ore | 3.54 |
Rare Earth | 3.52 |
Coal | 1.89 |
Rubber | 0.62 |
Nickel | 0.33 |
Platinum | 0.31 |
BlackRock World Mining Trust: Top 10 Holdings (as at 31 October 2012)
Holding | % |
---|---|
Rio Tinto | 9.3 |
BHP Billiton | 9 |
Glencore Finance Europe | 5.9 |
London Mining | 5.3 |
Freeport-McMoRan Copper & Gold | 4.5 |
First Quantum Minerals | 4.4 |
Fresnillo | 4.4 |
Industrias Peñoles SAB de CV | 4.1 |
Minas Buenaventura (ADR) | 4 |
Cia Vale Do Rio Doce | 3.2 |
Sector breakdown (as at 31 October 2012)
Sector | % |
---|---|
Commodities | 35 |
Metals | 21.5 |
Mining | 11.2 |
Cash & Cash Equivalent | 10 |
Silver Bullion | 9.9 |
Gold Bullion | 9.7 |
Miscellaneous | 2.5 |
Energy | 0.2 |