The long-term case for investing in commodities is alive and well, according to BlackRock’s Malcolm Smith, who believes the recent rough patch has simply presented investors with an attractive entry point.
The product strategist (pictured)
at the firm says the poor performance of the sector has put a lot of investors off, but adds it is to be expected in an asset class such as commodities.
"You should never hold a commodities fund for a week or a month – this is a long-term play," he said.
"Some of the valuations out there at the moment are pretty compelling at the moment, but that doesn’t mean that this year will be a great year."
"The happiest investors are those that look past the short-term."
He points to three key factors that drive commodities performance: structural, seasonal and cyclical.
"The long-term structural case is still very much alive," he said. "This is the idea of increasing consumption in emerging markets."
"There are certainly seasonal themes, in that some commodities do better than others depending on the time of the year."
"Natural gas prices tend to peak in the third week of November, for example. However, this is the kind of thing you leave in the hands of the fund manager."
"Lastly, there’s the cyclical theme, which has been something of a headwind in the last few years. However, it does seem the worst is behind us. There are still issues in the US and Europe, but data last year and the beginning of this year points to a recovery being more likely."
He says recent improvements in China bode particularly well.
"2012 certainly wasn’t a vintage year for commodities as a sector, which was particularly linked to China," he added.
"However, in October we started to see some improvements. China’s PMI [purchasing managers index] has been moving above 50 since then, which is significant and implies expansion in China is underway."
Performance of funds and index in 2012
Source: FE Analytics
While there has been much talk about the slowdown in China, Smith thinks investors need to put its GDP numbers in perspective.
He commented: "To characterise China as a country that’s slowing down doesn’t do it justice. Between 1995 and 2010 the economy grew at an average rate of 13 per cent a year, during which time there was a 6 million tonne increase in copper consumption."
"If China was to grow at half of this rate between 2010 and 2025, which is a conservative estimate, copper consumption would be at 9.2 million tonnes – 150 per cent more than the previous 15 years."
Smith says BlackRock is particularly positive on copper at the moment, as well as iron ore.
In addition to China, he points to the US as a country that will be a big driver of commodities performance.
"We haven’t seen the US or any other developed countries as leaders of commodities consumption for many years – indeed, in many cases they have been in decline," he said.
"The emergence of shale gas potentially gives it a plentiful low-cost energy supply and the re-emergence of it as a manufacturing base is a very powerful story."
Smith says the cyclicality of the equity market is also something to consider. He points out that equities remain under-owned – particularly those linked to natural resources – but advises investors not to expect this to last much longer.
"Investors need to be more aware of cyclical factors when they invest," he said. "There is much talk of the grand rotation – the move from fixed interest into equities – which will make a big difference for a fund investing in commodities stocks."
BlackRock’s highest-profile commodities-focused fund is the £2.56bn BlackRock Gold & General
portfolio, run by FE Alpha Manager Evy Hambro
It has a stellar record over the long-term, with returns of 249.12 per cent.
While its performance in the last three years has been strong compared with its benchmark and peers, a poor run for gold equities in general has led it to losses of almost 19 per cent over two years.
Performance of fund vs index over 2yrs
Source: FE Analytics
As a result of the sustained period of underperformance, Smith thinks gold equities represent good value at the moment, and points to improvements in the way gold companies are being run.
"There is an obvious disconnect between gold and gold equities," he said. "A lot of companies have disappointed on a cost basis."
"However, we are starting to see an improvement in the way company management is delivering value. Dividend payout ratios have increased by 100 per cent in the last two to three years, which is a very good sign."
Smith will speak in more detail about his 2013 outlook during a series of presentations at the Alpha Generators roadshow in February, which will take place across nine locations in the UK. If you are a financial adviser and are interested in going to one of these events, please register here.