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Why you can’t afford to write off commodities funds

BlackRock’s Malcolm Smith urges investors to use the sector’s current slump as a buying opportunity, as improving macro data coming out of China suggests share prices will not stay low for long.

Joshua Ausden

By Joshua Ausden, News Editor, FE Trustnet
Thursday January 31, 2013

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.

ALT_TAG 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.

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nickmoth Feb 01st, 2013 at 04:05 PM

One reason investors buy multi-asset funds is that the managers are supposedly moving between asset classes to stay ahead of the game when it comes to (for eaxmple) commodities going out of favour (selling high) or coming into favour (buying low): in other words they are supposed NOT in principle simply to hold long-term, but to buy, sell or hold to optimal effect. Is there any evidence they actually do this any better than dumb retail investors? I hold one multi asset fund that seems to stick with roughly the same mix of asset classes whatever happens, drifting with the winds rather than seeking to pile in at the right moment, or offload before the price in a specific sector tanks. Of course this keeps their dealing costs low, but hardly justifies the prospectus they are suppoed to operate on. When it comes to commodities surely the winners will be big-time, fleet-footed speculators and not long-termists. Being fleet-footed means taking a risk of course. Most of us prefer to test the weather before acting. I offloaded my BlackRock Gold and General well below its peak, but well above the buy price I paid three years before. As the saying goes: no one ever went bust taking a profit, as long as it really is a profit. And no one ever made money buying anything, till they do indeed eventually sell it for a profit. My guess is that like everyone else, most managers are not good judges when it comes to selling with optimal market timing, and you certainly won't ever find a single one here on TrustNet recommending that now is a good time to sell out of his/her fund/s!

Pete N Jan 31st, 2013 at 09:17 PM

Wonderful ! An attractive buying point ?!!! Errrr....Does that cover all the investors who already have the stock [which has gone straight off my radar] on to the "sold" stack

@Paul_Stocks_IFA Feb 01st, 2013 at 02:20 PM

IMHO I think this demonstrates that investments should be seen as long term.

If you have conviction that natural resources will deliver, then just because the asset class is performing poorly should not in itself lead you to sell - however the issue is that this is precisely what many investors do - hence they buy high (when a fund looks good) and sell low (when it's out of 'fashion').


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