Commodities have been on a tear in recent years, but investors that have backed the trend can hold on for a little longer, according to experts.
The Bloomberg Commodity index has gained 30.9% over the past three months, while global stocks have been in freefall, but the good times started before this year.
Prices started to rebound in 2021 as the world began to open and demand, which had been depressed following Covid-related lockdowns, started to increase. This trend was turbocharged by bottlenecks at ports, creating backlogs in key industries.
Total return of the Bloomberg Commodities index vs the MSCI World over 3yrs
Source: FE Analytics
More recently, the invasion of Ukraine has increased commodity prices, particularly oil & gas, with sanctions on Russia limiting the supply of these resources to European countries.
Two strategies that have epitomised the commodity sector this year are the $6.6bn (£5bn) BlackRock GF World Mining fund and its closed-ended counterpart, the £1.3bn BlackRock World Mining Trust.
Both portfolios are up year-to-date, although the trust (27%) has topped the fund (16.5%) in 2022 so far. With such a strong run under its belt, some investors may wonder whether there is more room left to run for these products.
Kamal Warraich, investment analyst at Canaccord Genuity Wealth Management, said it was a “difficult question to answer” as most active managers are underweight commodity sectors because the ability to forecast future cashflows is “generally very poor”.
“Commodities are, by their nature, cyclical and tied to the strength of the global economy and supply/demand factors, which means profitability is not very consistent,” he said.
“They tend to behave positively during periods of supply stress, as we’re witnessing now, and depending on the type of commodity they can also been tied to the fortunes of specific countries (think iron ore and China).”
However, he said there was merit in keeping some exposure to the sector to balance other parts of the portfolio, such as growth stocks, which have tumbled so far this year.
Popular funds such as Baillie Gifford American, Fundsmith Equity and LF Lindsell Train UK Equity have all made large losses in 2022, suggesting investors need to balance these funds with differentiators such as the BlackRock trust.
Total return of funds year-to-date
Source: FE Analytics
However, whether now represents a good time to invest depends on how long you are willing to lock your money away for, he said.
“Historically, it has rarely been a good idea to invest in commodities after they have spiked – and extremely high prices have triggered recessions. But they are a good inflationary hedge, and on a long-term view, there will clearly be opportunities tied to the energy transition,” said Warraich.
Rob Morgan, investment director at Charles Stanley, said we have entered a world where supplies are tighter and more unstable, which should in turn lead to investors taking on more inflation-hedging assets – something they have not had to do for a long time.
“Recently, the trust has being doing well as a hedge, and is worthy of a hold because of the important diversification it offers,” he said.
“Few broad investments have the ability to perform this way in such a difficult environment and it is a neat way of wrapping up commodities exposure in one package.”
The BlackRock World Mining Trust is managed by Evy Hambro and FE fundinfo Alpha Manager Olivia Markham. It aims to invest in natural resource companies that offer the best exposure to commodity prices within an acceptable risk level.
“The BlackRock team is well resourced and it’s a highly liquid trust of a decent size, concentrating mainly on large and profitable producers in stable locations,” Morgan said.
“The income yield stands to be attractive even at these higher price levels we have seen lately, though we can expect the share price to be exceptionally volatile and reactive to the geopolitical picture.”
This week the trust revealed final results for the year to 31 December 2021 in which its net asset value (NAV) was up 20.7%, while the share price discount widened from 3% to 5%.
Mick Gilligan, head of managed portfolio services at Killik & Co, noted that although mining share prices are hitting new highs, the sector still looks attractively valued.
“The sector trades on a price-to-sales ratio of 1.48x, which is above the 12-year average of 1.10x but still some way off May 2021’s 1.99x level and the 2.01x high in December 2010,” he said.
“Mining companies are in better shape than they have been for some time. Balance sheets are more robust and capital discipline is strong. BlackRock World Mining Trust is an attractive way to access the sector.”