The investment case for the mining sector remains strong after a bear market in commodities during recent years, according to BlackRock’s Evy Hambro, who is backing electric vehicles as a growth sector for miners.
Hambro, co-manager of the £640.5m BlackRock World Mining Investment Trust and co-chief investment officer of the BlackRock natural resources equity team, said the trust had struggled as confidence in the commodity market collapsed.
He explained: “We had a fantastic run in the early part of the century from 2000 until 2011. Then at the end of 2010 and 2011 it turned into a five-year bear market.
“Our sector as a whole and our performance had never had five years in a row of negative returns. It was unprecedented.”
Performance of trust vs sector & benchmark over 10yrs
Source: FE Analytics
As the above chart shows, the trust has lost 20.7 per cent over 10 years compared with a fall of 11.81 per cent for the Euromoney Global Mining index and a decline of 44.81 per cent for the average IT Commodities & Natural Resources trust.
Hambro said it wasn’t until the second half of 2015 when the BlackRock team became more bullish about the outlook for the market.
While its timing may have been slightly early as the market suffered further over a loss of confidence in the Chinese economy during the latter part of 2015, Hambro said he remains bullish on the sector.
He said the commodities bear market forced management at mining companies to impose greater control on costs and to focus on cashflow generation.
Hambro said there had also been a sharper focus on allocation of capital and how firms invest money, noting an increase in share buybacks – driving returns for shareholders.
Against a backdrop of weakened commodity prices, the manager said the trust has a more stock-specific focus rather than seeking exposure to underlying materials.
“In the trust, what we decided to do over the past few years is not to focus on commodity allocation as a primary way of allocating money,” he said. “We have gone for stock-specific views, where we think individual stocks can give value for us.”
As such, Hambro (pictured) said its stock-specific approach is independent from commodity prices and focuses on companies generating cash. 
The approach is built on a three-to-five-year view and across the market cap spectrum. It also has an overweight to mid-cap stocks, although it does count some of the sector’s largest names such as Rio Tinto, Glencore and BHP among its top 10 holdings.
While the trust has a stock-specific focus, the managers remain optimistic about the outlook for commodities prices. Global growth has remained resilient despite many of the geopolitical headwinds of the past couple of years.
“We’re pretty positive on the macro view, we’ve been talking about it for the best part of a year,” he said. “Commodity demand is higher than expected this year.”
The case for mining stocks remains compelling from a valuation perspective, highlighting the impact that a loss of confidence in commodities has had on their producers.
“The multiples [stocks] are trading at today, in our view, are very conservative,” he said. “Balance sheets are very strong compared to any point in the last 15 years.
“We agree that shares have gone up since 2015 but they have almost never been lower. If you invest in the sector, the value of share price levels today may be at a three-year high. The reason for that is because 18 months ago they were at a multi-decade low.”
One area that has become a key theme in the portfolio is electric vehicles and the mining companies that specialise in the materials required by battery makers, according to Hambro.
“We’ve been playing investment in the mining companies that are able deliver the raw materials that battery companies are going to need,” he said.
Demand for materials such as lithium and cobalt is likely to grow as the use of electric vehicles increases, particularly as governments around the world take further regulatory action to promote emission-free vehicles over existing internal combustion engines.
Hambro said the sector hasn’t yet seen the type of investment needed to meet demand for the materials and has been working with companies to help build capacity.
“It’s been a pretty successful part of the portfolio,” the manager said. “We’ve been building this theme in the fund to get the commodities that are going to benefit [from the trend]. It’s going to differentiate ourselves a lot from what other people are doing.”
He added: “As a team, we’re incredibly bullish about the EV [electric vehicle] market. We’re 100 per cent convinced that it will displace the internal combustion engine.
“The next time I change car, it will be to an electric vehicle.”
Hambro has been a manager on the trust since 2009 and also manages a number of other mandates including the BlackRock Gold and General fund. He is joined on the fund by Olivia Markham, who was appointed a co-manager in 2015.
Launched in 1993, the trust is approaching its 25-year anniversary, with around £1,782 paid out in dividends on a £1,000 investment during that time.
“For a boring investment in a mining vehicle, that is pretty good,” said the manager.
He added: “We only need the sector to re-rated by a couple of points to have a very good 12-18 month-period. We’re pretty excited. All the team has money invested in this fund.”
As previously mentioned, while long-term performance for the fund has been challenging, there have been more signs that the team’s more bullish outlook has paid off.
As the below chart shows, over two years the trust has delivered a total return of 104.19 per cent, compared with a rise of 100.32 per cent for the benchmark.
Performance of fund vs sector & benchmark over 2yrs
Source: FE Analytics
The trust is currently trading at a discount of 11.2 per cent and has ongoing charges of 1.1 per cent; it also has a yield of 4.13 per cent.