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The case for commodities

John Baron backs an unpopular sector and explains portfolio changes during the second quarter
The case for commodities

Market volatility is presenting some interesting opportunities – the commodities sector key among them. It has not escaped the market correction in part because its fortunes are associated with those of the global economy. However, there are specific factors at play that suggest the sector will bounce back faster than the market is expecting. Having introduced exposure across portfolios during the first quarter (Q1), changes during Q2 included adding further exposure.


A counter-intuitive call

The market is reflecting real concerns about the economic impact of Covid-19. Its volatility also in part reflects the sheer uncertainty of the outlook. It may therefore seem counter-intuitive to be increasing exposure to commodities at a time when economies are slowing. However, while accepting volatility will continue, a number of factors suggest the sector is better placed than most and should do well over the medium term.

On the demand side, despite economies slowing, a number of longer-term thematic trends remain supportive of commodities. These include urbanisation and a growing population. Governments around the world are also increasing infrastructure expenditure given the lack of investment in previous decades and the need to help steer economies away from recession or worse.

Climate change is another positive trend providing a tailwind. Many minerals are important to helping governments reduce their carbon footprint – and the sector’s investment trusts are positioning themselves accordingly. It is unlikely, for example, that the economic slowdown will significantly affect the push for electric vehicles.

Shorter term factors are also supportive. Governments across the world are overseeing huge fiscal stimulus packages, some game-changing in their nature. The gradual introduction of more resilient and local supply chains will also increase demand. And while global growth will certainly be lower, the economic stimulus measures introduced in China bode well – Asian economies look set to perform better than most in 2020/21.

Company valuations are another reason to be positive. The sector usually trades at a market discount – the average having been around 25-30 per cent relative to the S&P 500. Recently, the discount touched nearly 80 per cent – the highest for around a century. While this has narrowed somewhat since, the market has very little faith in the sector after a poor decade of performance.

Yet the sector has been proactive in putting its house in order over this period. Companies are much more focused on capital discipline. Exploration and extraction have been curtailed – and capacity reduced as a result. Balance sheets hold much more cash and less debt. The sector is now generating close to record free cash flow. It has entered this crisis in good shape and should therefore be able to withstand disruption better than most.

Furthermore, at a time dividends elsewhere are under pressure, the sector offers attractive income opportunities. Investment trusts standing on discounts enhance this further. By way of illustration, the nine real portfolios on the website hold BlackRock World Mining (BRWM), CQS City Natural Resources Growth & Income (CYN) and BlackRock Energy & Resources Income (BERI) – all on discounts of between 12 per cent and 20 per cent, while offering yields of 5.9 per cent, 6.9 per cent and 7.2 per cent, respectively.


Portfolio changes

In April, the Growth portfolio sold Schroder UK Mid Cap Fund (SCP) and reduced Henderson Far East Income (HFEL) at prices of £4.53 and £3.07, respectively. In May, it reduced North American Income Fund (NAIT) at a price of £2.36 and introduced two new holdings – BB Healthcare Trust (BBH) at £1.60 and Augmentum Fintech (AUGM) at £0.86.

With discounts having narrowed after a volatile period, and given the short-term uncertainty, a modest reduction in equity exposure was thought appropriate. The portfolio is also looking to modestly reduce its exposure as defined by country or region in favour of more thematic holdings when seeking growth – correctly chosen sectors will continue to outperform. Accordingly, SCP and NAIT were sold when standing close to their net asset value (NAV) and HFEL when standing on a 5 per cent premium.

BBH invests in global healthcare equities and adopts a high conviction approach that has delivered good returns relative to benchmark since the IPO. The sector should continue to produce superior long-term returns, essentially for the reasons highlighted by the manager: “...the healthcare systems of the developed world are fundamentally broken and need to be made fit for purpose in the 21st century as the population ages and ever more of us live with chronic medical conditions”.

AUGM invests in fast-growing European fintech businesses that are disrupting the banking, insurance, asset management and wider financial services sectors. Speaking recently with Tim Levene, the lead manager, the company is addressing a market where the global addressable annual revenue is approaching £10 trillion, with incumbents still laying claim to 91 per cent of global financial services revenue. The shares started the year at £1.03 and stood on a discount of around 20 per cent when purchased.

In an unusually busy quarter, the Income portfolio in April introduced Personal Assets Trust (PNL) and sold its holdings in AEW UK Reit (AEWU) and HFEL at prices of £413.65, £0.66 and £3.07, respectively. In May, it sold NAIT and introduced Edinburgh Worldwide (EWI), WisdomTree Physical Gold £ (PHGP) and International Public Partnerships (INPP) at prices of £2.36, £2.25, £131.24 and £1.63, respectively.

In June, the portfolio sold its holding in Invesco Enhanced Income (IPE) at £0.66, reduced and then sold JPMorgan Japan Smaller Companies (JPS) at prices of £4.33 and £4.23, introduced International Biotechnology Trust (IBT) at £6.79, added to its position in EWI at £2.42, and then added to BRWM at £3.38.

As with the Growth portfolio, many of these changes at least in part reflect a wish to reduce exposure by country or region (HFEL, NAIT and JPS) in favour of more thematic holdings (EWI, PHGP, INPP, IBT and BRWM). The portfolios have long benefited from maintaining a thematic element which, by its very nature, pursues a more global remit. In particular, this may become increasingly relevant to those seeking income at a time the balance sheets of companies rooted in many domestic economies are coming under ever greater strain.

Otherwise, IPE was sold given the corporate outlook remains uncertain, the need to maintain an element of balance when seeking exposure to different asset classes, and the extent of the bond sector’s bounce from market lows during the recent correction. Meanwhile, PNL’s remit is to protect and increase the value of its shareholders’ funds over the long term. The company invests in assets that have shown resilience during corrections, including index-linked bonds, gold bullion, cash and equivalents.

Growth Portfolio 
New City High Yield (NCYF)5.5%
Henderson Diversified Income (HDIV) 3.0%
UK shares 
Finsbury Growth & Income Trust (FGT)5.5%
BlackRock Throgmorton Trust (THRG)5.0%
Montanaro UK Smaller Cos (MTU)4.0%
The Mercantile Trust (MRC)3.5%
Standard Life UK Smaller Cos (SLS)3.0%
Oryx International Growth Fund (OIG)3.0%
Henderson Smaller Companies (HSL)3.0%
International shares 
Edinburgh Worldwide (EWI)7.0%
JPMorgan Japan Smaller Cos (JPS)5.0%
North American Income Trust (NAIT)3.5%
Templeton Emerging Markets (TEM)3.0%
Henderson Far East Income (HFEL)2.5%
Herald (HRI)6.5%
HICL Infrastructure Company (HICL)5.5%
Allianz Technology Trust (ATT)5.5%
Bluefield Solar Income Fund (BSIF)3.5%
International Biotechnology Trust (IBT)3.5%
BB Healthcare (BBH)3.0%
BlackRock World Mining (BRWM)3.0%
Standard Life Private Equity Tst (SLPE)2.5%
Augmentum Fintech (AUGM)2.5%
Commercial property 
Standard Life Property Inc (SLI)3.5%
TR Property (TRY)2.5%
Holdings are rounded to the nearest 0.5%





Income Portfolio  
New City High Yield (NCYF)6.5%
Henderson Diversified Income (HDIV)3.5%
UK shares 
Finsbury Growth & Income (FGT)5.5%
The Merchants Trust (MRCH)4.0%
Montanaro UK Smaller Cos (MTU)4.0%
Invesco Perpetual UK Smaller Cos (IPU)3.5%
Shires Income (SHRS)2.5%
International shares 
Scottish Mortgage Trust (SMT)7.0%
Edinburgh Worldwide (EWI)5.0%
Utilico Emerging Markets (UEM)2.5%
HICL Infrastructure Company (HICL)5.5%
Bluefield Solar Income Fund (BSIF)5.5%
Allianz Technology Trust (ATT)5.0%
BlackRock World Mining (BRWM)5.0%
Herald (HRI)4.5%
Personal Assets Trust (PNL)4.0%
WisdomTree Physical Gold £ ETF (PHGP)3.0%
International Public Partnerships (INPP)3.0%
JLEN Environmental Assets Gp (JLEN)2.5%
International Biotechnology (IBT)2.5%
Commercial property 
Standard Life Property Inc (SLI)3.5%
Regional Reit (RGL)2.5%



Portfolio Performance 1 Jan 2009 - 30 Jun 2020   
 Growth Income
Portfolio Total Return [%]293.7 209.1
MSCI PIMFA Total Return [%]160.8 125.1
Relative Performance [%]132.9 84.0
Yield [%]3.2 3.7
The MSCI PIMFA Growth and Income benchmarks are cited [Total Return]