Investment
Trusts (2): And BlackRock Commodities Income Investment Trust
The
first mutual fund (1774) was founded at Amsterdam's Stock Exchange, courtesy
Wikipedia
The advantages of Investment Trusts as investment vehicles over Open Ended Investment Companies (OEICs) and Exchange Traded
Funds (ETFs) are discussed in the previous article at http://thejoyfulinvestor.blogspot.co.uk/2014_03_01_archive.html
To resume, on average ITs perform better than ETFs and OEICs, as well as their benchmark indices, in nearly all
equity markets. The one exception is the USA, where ITs perform about the same
as ETFs and their benchmarks. It might surprise the sceptical investor, but
fund managers, given the right structure, do perform better than their
benchmarks.
John Baron is a former fund manager and
author of the Financial Times' Guide to Investment Trusts (Pearson,
2013). Mr Baron runs two live, funded portfolios of investment trusts,
which he publishes monthly in the Investors Chronicle. Both of his
portfolios have handily outperformed their benchmarks over the past five years:
|
Return
Jan 2009 to April 2014
|
Growth
Portfolio
|
Income
Portfolio
|
|
Mr Baron's portfolio
|
+130%
|
+108%
|
|
FTSE/WMA Private Investor Indices
|
+71%
|
+57%
|
His Growth Portfolio is currently 15%
invested in bonds, 6% in commercial property, 1% in cash and 79% in equities.
He uses 22 ITs and one ETF. The Income Portfolio has 36.5% invested in bonds,
9% in commercial property, 1% in cash and 53.5% in equities. The funds are
invested in 19 ITs and two ETFs. He only uses ETFs for part of his bond
holdings.
The annualised outperformance of 9.7%
for the Growth Portfolio and 8.1% outperformance for the Income Portfolio compared
to their benchmarks are exceptional. In part, this is due to Mr Baron's choice
of ITs and in part to the underlying performance of the IT fund managers.
The main considerations for IT investing are covered in the previous
article at http://thejoyfulinvestor.blogspot.co.uk/2014_03_01_archive.html
-------------------------------------------------------------------------------------
BlackRock
Commodities Income Investment Trust
Chino
Copper Mine, New Mexico, courtesy Wikipedia
The worst performing Investment Trust (IT) sector over the last
three years is commodities and natural resources.
On average, this sector has lost 51% of its value in this time, according to
Trustnet.
No IT sector presents a more contrarian theme than commodities and
natural resources.
BlackRock Commodities Income Investment Trust (BRCI), capitalised at
108 million pounds, is the best performing IT in
the commodities and natural resources category over one and three years
(Trustnet). Mr Baron has included it in his income portfolio. The shares (in
blue) and net asset value (in yellow) have comfortably beaten its benchmark (in
red):
BRCI
share price and NAV compared to the benchmark, courtesy Trustnet. Click to
enlarge
The benchmark used by BRCI
is the average of the MSCI indices on energy companies and commodity companies.
By investing in both
the energy and mining sectors, BRCI has the
flexibility to move its funds from one sector to the other. This gives it an
advantage over ITs that are limited by their mandate to investing in either
energy or mining.
At the end of
February, about 40% of BRCI's funds were
invested in ten companies. Seven are in the energy sector (BP, Canadian Oil
Sands, Chevron, ENI, ExxonMobil, Royal Dutch Shell and Total) and three in
mining (BHP Billiton, GlencoreXstrata and Rio Tinto). Geographically, 41% of
the IT's assets are in companies with global operations, with another
40% in companies based in the USA and Canada. By sector, BRCI's assets
are allocated as follows:
Sector (as at 28.02.2014) % of BRCI's Total Assets
Integrated Oil 36.1
Diversified 20.1
Exploration & Production 13.9
Copper
7.6
Gold
6.2
Oil Sands
4.9
Iron Ore 4.0
Oil Services 3.3
Distribution
2.8
Nickel
2.6
Coal
2.5
Fertilizers
2.0
Aluminium
1.5
Silver
1.2
Uranium
1.1
Platinum
0.5
Current liabilities
(10.3)
TOTAL
100.0
The fund's stated
objective is "To achieve an annual dividend
target and, over the long term, capital growth by investing primarily in
securities of companies operating in the mining and energy sector." In practice,
BRCI has increased the dividend by an average of 4% every year since its
launch in 2005. At the present share price of 108p, BRCI yields 5.6%.
However, revenue
earnings per share have remained static over this period. Base metal prices have fallen significantly in recent years and, consequently,
earnings collapsed at the large mining companies. The ten-year chart of copper
prices ($ per ton) illustrates the extreme volatility of metal prices in this
period.
10-year
copper prices, courtesy www.fastmarkets.com. Click to enlarge
The recent fall in
metal prices is attributed to falling demand from
China and to increased supply from mines that were opened to take advantage of
the sharp increase in base metal prices in the 2000s. To add to this tale of
mining woe, the dollar price of gold has fallen by 30% since its peak in 2011
and silver has fallen by 59% since it reached its peak in April 2011. The
immediate outlook for mining is not good, but taking a longer view, the
mismatch between demand and supply will work its way out, as it has in the past.
In the meantime, the major mining companies are concentrating on cost reduction
and cash conservation, which should improve profitability.
Oil prices were also
very volatile until 2011, since when they have plateaud.
Brent
Crude Oil price in $ per barrel, courtesy Money Week. Click to enlarge
The flattening of the
oil price in the last three years is attributed to
cheap gas from fracking in the USA counterbalanced by a determined effort by
OPEC to keep prices high by limiting output.
The earnings of the
oil majors, as a whole, have been hit by political,
production and environmental problems that have more than countered the
beneficial impact of high oil prices. While the immediate outlook is uncertain,
in the longer term oil demand is expected to continue its long-term upward
trend, which may sustain oil prices. Other externalities are unlikely to be so
favourable. State owned oil companies have access to cheaper oil. The
investment in difficult sources - tar sands, deep-water fields, the Arctic -
can continue to cause production and environmental problems. And while oil
companies might look to Iraq, Russia and Venezuela (with the highest proven
reserves in the world) for growth, the former two are high risk and the
government of Venezuela must first modify its rules for foreign companies. But
it would be foolish to underestimate the managers of these companies and their
know-how. Just consider how the industry has developed gas fracking or drilling
for oil in the most inhospitable places.
Investing in this
sector is a contrarian stance. For investors
willing to take on this risk, BRCI offers a reasonable home. At the present
price of 108p the shares trade at a discount of 1.8% to net asset value (NAV)
and yield 5.6%. BlackRock manages the discount and premium, so its share
price does not move far from NAV.
BRCI
share price discount/premium. Graph courtesy Trustnet, click to enlarge.
If BRCI continues to
increase its dividend payout by 4% a year, then at
the current price this implies a 9.8% rate of return for the investor prior to
any capital gains or losses.
The prospective
investor will consider:
1.
BRCI
has a revenue reserve of 3.1 million pounds with
which to support its dividend payout.
2.
With
75% of its assets in non-sterling investments,
mainly the US and Canadian dollars, there is a currency risk for UK investors.
In one sense this is irrelevant, given that metal and oil prices are quoted in
US dollars.
3.
BRCI
has a new lead manager, Olivia Ker, who is an
unknown quantity. Her assistant, Tom Holl, is ranked in the first quartile of
fund managers for each of the last three years. However, BlackRock works
as a team, and both managers are guided by the in-house team.
4.
Put and
call options have been used by BRCI to bring in revenue. This is, however, an added source of risk. As is the use of debt,
which amounts to 10% of gross assets.
5.
BlackRock charges 1.1% to manage the fund and it claims to have a total cost
ratio of 1.4% for this fund. This is cheaper than a corresponding OEIC. No ETF
offers an exact alternative for the UK investor. There are ETFs for 'broad
basket' commodities, for just metals or just energy; and managers do make a
difference. However, the Lyxor ETF Commodities CRB TRACKER (CRBL) is
worth considering for investors wishing to use a cheap tracker. It claims a net
expense ratio of 0.35%.
6.
Directors
own shares in BRCI to the value of 250,000 pounds. BlackRock
does not disclose the holdings of its fund managers.
