Port­fo­lio Man­ager, Black­Rock Com­modi­ties In­come In­vest­ment Trust

Shares - - TALKING POINT - By Olivia Markham,

Con­fi­dence is re­turn­ing to the en­ergy sec­tor, says port­fo­lio man­ager Olivia Markham, while min­ing may not have reached its peak.

Cap­i­tal at risk: All fi­nan­cial in­vest­ments in­volve an el­e­ment of risk. There­fore, the value of your in­vest­ment and any in­come from it will vary and your ini­tial in­vest­ment can­not be guar­an­teed. The Black­Rock Com­modi­ties In­come In­vest­ment Trust in­vests in the en­ergy and min­ing sec­tors, aim­ing to achieve an an­nual div­i­dend tar­get and cap­i­tal ap­pre­ci­a­tion over the longer term. This longer-term view is im­por­tant as both sec­tors can drift off the radar of gen­er­al­ist in­vestors dur­ing rocky pe­ri­ods or down­turns. In the case of en­ergy, the Brent Crude Oil price has been through a slump over the past few years but, hav­ing risen above $70 per bar­rel in 2018 (Trad­ing Eco­nom­ics), we be­lieve that it has reached a point of rel­a­tive price sta­bil­ity and it ap­pears well sup­ported at cur­rent lev­els.

As con­fi­dence grows that cur­rent oil prices are here to stay, the sec­tor is well po­si­tioned to out­per­form broader stock mar­kets over the medium term. We also be­lieve that en­ergy eq­ui­ties are at­trac­tively val­ued, which could trans­late into gen­er­ous div­i­dend yields. Past per­for­mance is not a re­li­able in­di­ca­tor of fu­ture re­sults and should not be the sole fac­tor of con­sid­er­a­tion when se­lect­ing a prod­uct or strat­egy.

Our view is that en­ergy shares have not yet risen enough to re­flect this oil-price strength. The Trust has there­fore taken an over­weight ex­po­sure to ex­plo­ration and pro­duc­tion com­pa­nies, while also fo­cus­ing on those en­ergy com­pa­nies of­fer­ing at­trac­tive in­come streams. There is no guar­an­tee that any fore­casts will come to pass.

Global eco­nomic fac­tors

We be­lieve the out­look for global eco­nomic growth re­mains ro­bust and we see this sup­port­ing healthy growth in the de­mand for oil over the next five years. Ris­ing trade ten­sions are a key risk but for now we don’t see them de­rail­ing the cur­rent pos­i­tive out­look.

An­other risk to global growth in oil de­mand is re­new­able en­ergy and the move to­wards elec­tric ve­hi­cles in par­tic­u­lar. How­ever, we see this as a longer-term threat, on a 10 to 15-year view.

Mean­while, in terms of oil sup­ply, US shale oil pro­duc­tion has not in­creased as fast as some had feared and OPEC con­tin­ues to sup­port the oil price with its pro­duc­tion cap. We are also see­ing gen­eral con­straints on global oil pro­duc­tion, re­sult­ing from re­duced spend­ing in the sec­tor since the oil-price crash in mid-2014.

Resur­gent min­ing?

Like en­ergy, min­ing had been out of favour fol­low­ing a tor­rid pe­riod from 2011 through to the end of 2015. Since then, how­ever, we have seen vastly im­proved per­for­mance through 2016 and 2017 as com­mod­ity prices re­bounded and min­ing com­pa­nies re­duced their debts. Our view is that we are still a long way be­low the 2011 peak and the sec­tor con­tin­ues to trade at a val­u­a­tion dis­count to broader stock mar­kets. Mean­while, free cash flow in the sec­tor is close to the high­est it has ever been. Even so, many in­vestors re­main wary, ex­pect­ing min­ing com­pa­nies to make the same mis­takes of the past in terms of poor cap­i­tal dis­ci­pline. Our view is that the pain of the re­cent down-cy­cle is still too fresh in the minds of man­age­ment teams for this to be­come a wide­spread is­sue in the near term.

As with en­ergy, we be­lieve the min­ing sec­tor of­fers a pre­mium div­i­dend yield com­pared with broader eq­uity mar­kets, as many of the big min­ers have switched to pay-out ra­tio div­i­dend poli­cies where div­i­dends are based on earn­ings. We be­lieve this is a sign of pos­i­tive cap­i­tal dis­ci­pline and it gives us greater cer­tainty around in­come when in­vest­ing for the Trust.

Over the year to date (Au­gust 2018), the in­dus­trial com­modi­ties and min­ing eq­ui­ties have come un­der pres­sure due to fears of trade wars in­volv­ing the US and China. How­ever, in our view the re­cent falls in base me­tal prices look over­done rel­a­tive to ac­tual de­mand con­di­tions, cre­at­ing an at­trac­tive en­try point to the sec­tor.

There is no guar­an­tee that any fore­casts will come to pass.

En­vi­ron­men­tal fac­tors

Last, but not least, en­vi­ron­men­tal, so­cial and cor­po­rate gov­er­nance (ESG) has be­come an in­creas­ingly im­por­tant topic in the world of in­vest­ment over the past few years. For us, in­vest­ing in the en­ergy and min­ing sec­tors, it is es­pe­cially im­por­tant that ESG con­sid­er­a­tions are em­bed­ded in our phi­los­o­phy and process.

Our start­ing point is that we don’t make judge­ments about a com­pany be­ing a good or bad com­pany just be­cause of the busi­ness or sec­tor it is in. In­stead, we look for com­pa­nies demon­strat­ing the best ESG, as we be­lieve it is pos­i­tively cor­re­lated with in­vest­ment per­for­mance.

When look­ing at min­ing com­pa­nies, for ex­am­ple, their abil­ity to main­tain their so­cial li­cence to op­er­ate is of crit­i­cal im­por­tance. How­ever, ESG is only one of many fac­tors we look at and for a stock to be in­cluded in the port­fo­lio the val­u­a­tion and fun­da­men­tals also need to be right.

For more in­for­ma­tion on this Trust and how to ac­cess the op­por­tu­ni­ties pre­sented by the com­modi­ties sec­tor, please visit: www.black­rock.com/uk/brci All views ex­pressed as at Septem­ber 2018.

Trust-spe­cific risks

Over­seas in­vest­ment will be af­fected by move­ments in cur­rency ex­change rates. Emerg­ing mar­ket in­vest­ments are usu­ally as­so­ci­ated with higher in­vest­ment risk than de­vel­oped mar­ket in­vest­ments. There­fore, the value of these in­vest­ments may be un­pre­dictable and sub­ject to greater vari­a­tion. Min­ing shares typ­i­cally ex­pe­ri­ence above- aver­age volatil­ity when com­pared to other in­vest­ments. Trends which oc­cur within the gen­eral eq­uity mar­ket may not be mir­rored within min­ing se­cu­ri­ties. In­vest­ment strate­gies, such as bor­row­ing, used by the Trust can re­sult in even larger losses suf­fered when the value of the un­der­ly­ing in­vest­ments fall.

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