Black Rock Commodities Income Investment Trust –ISIN GB00B0N8MF98
Commodities have made a strong start in 2018, rising to a three-year high. The Bloomberg Commodity Spot index hits its highest level since 2014 last week after strong readings for manufacturing activity around the world and increased global demand forecasts. A weaker dollar and various supply constraints/worries such as Libya, Iran, North Sea pipeline affecting oil supply and Chinese shutdowns affecting various metals.
Resource companies themselves have cut spending on new projects and have generally stronger balance sheets and are returning more to shareholders.
One way of accessing this sector is through the Black Rock Commodities Income Investment Trust.
The object of this investment trust is to achieve an annual dividend target, (currently 4p), and over the long term, capital growth, by investing primarily in securities of companies operating in the mining and energy sector.
- The fund predominantly invests in large quoted equities, the split between oil and mining being approximately oil, majors plus exploration/production 38%, mining 46%, miscellaneous 16% as at end November 2017.
- Underlying major mining companies, have for the large part responded to the historic weaker trend in resource prices, maintaining balance sheet discipline and adjusting their cost bases.There have been some examples of spectacular self-help stories e.g. Glencore and Anglo American Mining.
- Recent mining conferences have highlighted the need for increased use of Lithium, Cobalt, Nickel and Copper relating to Electronic Vehicles.BRCI has been building exposure to these elements over the last couple of years. For example, Glencore is now one of the leading global suppliers of Cobalt, a vital component for rechargeable batteries.
- Rising economic growth projections, supply constraints and a changing OPEC stance have significantly helped the prospects of the major oil companies held. Royal Dutch, for instance, has announced much better than expected results and offers a dividend yield over of over 6%. Statoil and Total also confirmed the more favourable trend for oil majors.
- As at End November 2017, the Fund ‘s major holdings featured Royal Dutch (6.1%), First Quantum (9.3%), Rio Tinto (6.7%), BHP (6.6%), Glencore (5.0%), and Chevron (4. 5%).The top ten holdings represented nearly 52% of the total portfolio, a relatively concentrated stance.
- The global nature of these companies provides exposure to non-sterling currencies, especially the US dollar. This can benefit both capital and income when sterling is on a weaker trend.
- On a TECHNICAL NOTE, it should be noted that energy and material stocks represent about 25% of the FTSE100 index. If using this as a broad benchmark, the weighting in these sectors can materially affect the relative performance of UK active and passive funds.
- As well as targeting financially strong dividend paying equities the company also employs option writing strategies and an element of gearing, currently near 3%, to further improve the sources of income.
- On an annual yield, over 5%, (payable quarterly), this trust represents a high income longer term value play, but investors should be aware of the volatility of the underlying sector-maybe another reason to adopt a pooled approach. The trust currently trades at a current discount to net assets of near 6%, near the year’s low, compared with the premium on which it traded for most of the last five years (see graph below). The company operates a discount management procedure from time to time.
Sources:Trustnet,London Stock Exchange,Corporate Web Site,Numis.
by Ken Baksh
Ken has over 35 years of investment management experience, working for two major City institutions between 1976 and 2002.
Since then he has been engaged as a self-employed investment consultant. He has worked with investment trusts, unit trusts, pension funds, charities, Life Fund,hedge fund and private clients. Individual asset managed have included direct equities and bonds pooled vehicles currencies, derivatives and commodities.
Projects undertaken in a number of areas including asset allocation, risk control, performance measurement, marketing, individual company research, legacy portfolios and portfolio construction. He has a BSc(Mathematics/Statistics) and is a Fellow Member of the UK Society of Investment Professionals.
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Please contact Ken, (kenbaksh@btopenworld.com) for further information