Over the last three years, the HSBC Global Mining index has lost a painful 20.98 per cent and many mining funds have lost even more. This comes after the index gained 221.59 per cent over the last decade – but investors have been waiting in vain for similar returns since then.
Performance of index over 3yrs
Source: FE Analytics
To be honest there was probably a significant amount of hot, speculative money in the area, which exited as things turned nasty. However, there have been underlying structural problems too.
Slowing growth in China hasn't helped, and many mining firms and other commodity producers have reinvested profits unwisely or otherwise failed to keep costs under control.
Nonetheless, I believe it is worth sticking with commodities. While the sector is not performing well now it is possible it will have its day again. The whole point of a diverse portfolio is that various areas perform for you at different times.
The key long-term danger for most investors is inflation. True, it is probably not something to be concerned with in the short-term, with the economy still stuttering. Yet if growth is successfully revived in the West, the demand for energy and raw materials, already buoyant from the increasing wealth across the emerging world, could rise strongly.
For UK motorists already struggling with high global oil prices and a weak pound it is an unsavoury prospect – and other key commodities could face escalating prices too, notably food.
In this respect, I believe commodities are now a diversifier within a portfolio.
Falling raw material prices are generally good news for most companies. Conversely, if commodity prices rise it would likely be bad for many investments that suffer in times of higher inflation. Yet for commodity suppliers it would be welcome.
The other important factor to watch is supply. For many metals, the pace of new investment in mines and infrastructure has slowed, which could mean bottlenecks down the line – though it is important to bear in mind each individual commodity has its own supply and demand dynamics and there can be shortages in some areas and not in others.
There are a number of ways investors can attempt to benefit from rising commodity prices, including individual shares, or exchange traded commodities (ETCs) which aim to track prices.
Another option is funds investing in the sector, for example First State Global Resources, Sarasin AgriSar or BlackRock Gold & General.
Over the last three years, all of the funds have taken a heavy hit. The BlackRock fund has suffered the most, with a loss of nearly 40 per cent over three years. However, both the First State and BlackRock funds have come surging back in recent weeks, gaining 3.89 per cent and 5.38 per cent over the last month respectively.
There are many others to consider too, though it is worth remember these are specialist investments and you should consider the risks before investing.
Personally, I'm not sure ETCs are suitable for most private investors. They often offer exposure to derivatives rather than the underlying commodity itself, which brings about additional risks, so my preference for diverse exposure is through funds, even though it means taking on the risk that commodities companies continue to disappoint investors.
I will be looking in the remainder of 2013 for opportunities to add to my exposure. Judging by the present weakness across the sector there could be plenty, but management change plus a more focused, disciplined approach to new projects could slowly turn investor sentiment around.
Rob Morgan is a pensions and investment analyst at Charles Stanley Direct. The views expressed here are his own.
