Commodities have come flying back so far in 2016 following a sustained period of hefty price falls.
Various reasons have been given for this phenomenon such as a rebalancing in the supply/demand dynamic in the space, signs of an inflationary environment and very low valuations. Whatever the drivers have been, FE data shows the Bloomberg Commodity index is up 12 per cent so far this year with certain individual commodity prices up significantly more.
Performance of indices in 2016
Source: FE Analytics
Of course, some will no doubt think that given the pace of the recent rally the best returns have now been made. That being said, in a recent FE Trustnet article, Schroder’s head of commodities Geoff Blanning said the five-year run of heavy losses in commodities looks like it could have ended and argued the asset class’ next bull market has already started.
“Following five years of devastatingly poor returns in the market, sentiment towards commodities is at rock bottom, but it’s starting to turn following the surge in the prices of a wide variety of products since the beginning of the year,” he said.
“The biggest price gains, in percentage terms, occur at the beginning of a bull market. And the best (lowest risk) time to buy anything is when the consensus expectation is turning from bearish to bullish, as is happening now in commodities. Now is the time for investors to focus on this unloved asset class.”
While some will be very sceptical of buying into natural resources following a number of false dawns over recent years, for those investors who are considering upping their exposure to the space, we take a look at three funds that might be worth considering.
We start off with probably the best-known fund in the commodities space – JPM Natural Resources.
Under the stewardship of Iain Henderson and his team during the 1990s and 2000s, it was one of the most popular funds with investors and grew to be one of the largest in the IA universe as the commodity super-cycle was in full swing.
It is fair to say, though, that Neil Gregson took charge of the fund at an inopportune time in January 2012 as China’s slowing growth and mass oversupply put pressure on the price of iron ore and other natural resources.
Indeed, over his tenure, JPM Natural Resources is down some 56 per cent. It has also seen hefty outflows, shrinking from £2.2bn when Henderson was in charge to its current size of £593m.
However, since the market bottomed in January, the fund has returned some 46.13 per cent, outperforming its Euromoney Global Mining & Energy benchmark in the process. It is also ahead of the index over longer time frames now as well.
Performance of fund versus index in 2016
Source: FE Analytics
Gregson runs a diversified portfolio which is built by using top-down macro analysis which then guides stock selection.
He invests across energy, base metal mining and precious metal mining companies. The fund’s largest holdings include well-known names such as Rio Tinto, Royal Dutch Shell, Glencore and Chevron.
Its ongoing charges figure (OCF) is 0.93 per cent.
BlackRock Commodities Income Investment Trust
Closed-ended funds tend to outperform their open-ended rivals during rallying markets as narrowing discounts and gearing can give them edge. Therefore, if investors believe in a commodities bull market, they may favour investment trusts for their exposure.
The average discount within the IT Commodities & Natural Resources sector is also 18.3 per cent, which is attractive compared to other more mainstream equity peer groups.
However, there are certain members of the sector that have always tended to trade out on wide discounts to NAV so one possible option might be the BlackRock Commodities Income Investment Trust.
Its discount is only 2.13 per cent, though that compares to an average premium of 1.44 per cent and 1.46 per cent, respectively, over one and three years.
Since Olivia Markham and FE Alpha Manager Tom Holl took over the portfolio in January 2014, BlackRock Commodities Income has been one of the best performing members of the sector despite its losses of 34.51 per cent.
BlackRock Commodities Income’s dividend history since 2011
Source: FE Analytics
Thanks to those losses, though, its dividend yield is close to 10 per cent with revenue reserves of 1.36 years. FE data shows it has increased its pay-out in four of the last five years (including a maintained dividend in 2015 due to a poor market backdrop).
Markham and Holl currently hold 40.8 per cent of their portfolio in oil & gas stocks, 19.4 per cent in precious metal miners and 15.5 per cent in companies involves with basic materials. Top 10 holdings include Exxon Mobil, First Quantum Minerals, Royal Dutch Shell and Newcrest Mining.
BlackRock Commodities Income is geared at 1 per cent and has ongoing charges of 1.44 per cent.
Investors may want more focused commodity exposure within their portfolios, though, and an area of the market which has seen the biggest bounce back has been the oil & gas space.
There is only a small selection of funds in the IA universe that purely focus on energy, but one with the most experienced management team is the offering from Guinness Asset Management.
The £250m Guinness Global Energy fund has been managed by Tim Guinness and Will Riley since its launch in September 2008 – both of whom are highly rated within the industry. They take a value-orientated approach to the market which is predicated on bottom-up stock picking and prefer to run a highly concentrated portfolio of around 30 to 40 stocks.
According to FE Analytics, the fund is now underperforming against its MSCI AC World benchmark since its launch though.
Performance of fund versus index since launch
Source: FE Analytics
However, this is largely due to the fact the fund – like most actively managed portfolios in the space – has fallen harder during the recent oil price collapse. Indeed, our data shows the fund has usually significantly outperformed in rallying markets such as in 2009, 2013 and so far this year with gains of 36 per cent since mid-January.
Guinness and Wiley currently have 41 stocks which are equally weighted. The US is their largest regional exposure at 49.13 per cent but the portfolio also includes Gazprom, Statoil, Total and BP.
Its OCF is 1.24 per cent.