Commodity investment trusts, Photo by Dominik Vanyi on Unsplash

Commodity Investment Trusts Are All The Rage

The gold price has soared this year allowing commodity investment trusts to come back into favour once again.

Right now, five of the eight trusts in the sector are up more than 10% this year.

One of them, Golden Prospect Precious Metals, has more than doubled.

Take that Scottish Mortgage!

But hang on…

Go back a bit further and it’s a very different story.

Six of these trusts have a decade-long track record and five of those (including Golden Prospect) would have lost you money over the last 10 years.

The best performer, BlackRock World Mining, is only up by a total of 15% over the last decade.

Of course, not all commodities have gone up in 2020. Gold and precious metals have done very well, along with iron ore. Base metals have lost a little ground but coal and oil have seen very heavy falls, as has been well documented.

Getting burned

I owned one of the trusts in the past, losing money in the process, which has no doubt heavily influenced my view of this sector.

My dabbling with commodity investing began in 2007 and City Natural Resources High Yield Trust (now CQS Natural Resources Growth and Income) was my weapon of choice, alongside several small stakes in junior miners and oil companies.

It worked well for a while. Then the financial crisis knocked the sector for six.

City Natural Resources recovered very quickly, though, its share price quadrupling from the end of 2008 to the end of 2010, thanks to the then soaring gold price.

But I overstayed my welcome at this party, trimming my stake but not selling out completely until 2017.

The trust’s high yield kept me interested for much longer than it should have, even after its dividend stopped increasing in 2014.

It could have been worse though. There is one absolute horror show in this sector, which I wasn’t even aware of until I started researching this piece.

What rhymes with GRIT?

Global Resources Investment Trust (GRIT) raised £40m in March 2014, pricing its shares at 100p and initially investing in around 40 companies.

Its shares were suspended at 2.75p in June 2020, as it was unable to publish its accounts by the required deadline.

A lot of the damage was done early on as commodity prices were hit hard in 2014.

By July 2014, just four months after listing, GRIT’s shares had already fallen to the low 30s and were trading at a discount of 50%.

Its shares continued to fall until early 2016 when the share price reached 2.5p and the discount to net assets was close to 90%.

GRIT tried to wind itself up last year, but even that didn’t work out. It changed its board of directors and saw the sale of remaining major investment fall through. Another buyer emerged in February but no price was disclosed and no information has been issued since.

No doubt there’s a lot more to this story that what I have gleaned from reading a few RNSes. But if you wanted an illustration of what can wrong with commodity investing, GRIT is a classic example.

Miners vs the commodity

Before looking at the remaining trusts in the sector in a little detail, some basic observations on the commodity sector as a whole.

It’s very, very cyclical. Commodity prices can do nothing for years on end, or even fall, and then seem to explode. Some people explain this by the Commodity Supercycle theory.

Demand for commodities goes up and down with the economic cycle but supply also varies greatly over time.

It can take several years from discovering a deposit, appraising it, building a mine/sinking wells, to extracting the commodity in question. A lot can change while all that happens.

You can invest in the commodities themselves or the companies that produce them.

The companies tend to be either giants, like BHP Billiton or Royal Dutch Shell, that are diversified across regions and different commodities, or minnows with a single oil or mining prospect.

Discoveries often turn out to be uneconomic to extract, mines often face production issues or see their permits revoked. I even had one investment which had its entire resource effectively confiscated by the authorities.

Despite the fact that pretty much every junior oil and mining company seems to be run by a “world-class” management team, the vast majority of them fail, but not before extracting several rounds of shareholder money at ever lower share prices.

The runners and riders

I very much doubt I’ll ever invest in a commodity trust again. Along with their fluctuating fortunes, there are environmental concerns with many of their underlying investments.

Nevertheless, I still think it’s interesting to look at such sectors, much like I did with debt investment trusts if only to remind myself not to make the same mistakes again!

Here are the eight trusts in the Commodities and Natural Resources sector right now:

Baker Steel ResourcesBSRTApr-1071-1224-27-362.1%
BlackRock Energy &
Resources Income
BlackRock World MiningBRWMDec-93701-1223157555.5%1.0%
CQS Natural Resources
Growth & Income
Geiger CounterGCLJul-0618626-62-674.1%
Global Resources
(shares suspended)
Golden Prospect
Precious Metals
Riverstone EnergyRSEOct-13215-29-55-672.0%

BlackRock World Mining dominates this sector and is valued at some 50% more than the other seven trusts put together.

Six of these trusts are valued at less than £100m, so are likely to have fairly limited liquidity. Riverstone seems to be doing its best to get below the £100m level as well.

Even after the gains of the past year, the ten-year records of these trusts is absolutely shocking. And the two trusts launched in 2013 and 2014 have done the worst of all!

The MSCI Natural Resources index, which is dominated by the big energy companies, is flat in US dollar terms over the last 10 years.  The same is true for the MSCI Metals & Mining index.

In sterling terms, these two sectors have probably done a little better, so this suggests most of these trusts haven’t been able to keep pace with the wider sector over the last decade.

Perhaps most astounding of all is that six of the eight trusts have lost money since they launched. Five of them have lost between a third and nearly all their value.

The only exceptions are CQS and BlackRock World Mining. They have returned around 7% and 8.5% a year respectively since they launched.

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The MSCI Metals & Mining index is up around 5% a year since 1995 in sterling terms, so BRWM seems to have outperformed that since it joined the market.

Looking back at the full history of BRWM’s returns shows how difficult commodity investing can be. Its share price was flat for the first ten years of its life. Then it rose eightfold in just a few years.

However, those who bought in 2008 are probably still underwater today and the trust lost 75% of its value between 2011 and 2016.

Most of this sector still trades on a double-digit discount, albeit a narrower one than when the sector bottomed about five years ago. While Global Resources is quoted at a premium of 91%, that’s against its net asset value as of June 2019.

Charges are also pretty high, although the small size of most of the trusts is undoubtedly a key driver of this.

Most of these trusts use a little gearing. Baker Steel, Golden Prospect, and Riverstone are ungeared while the others average around 10%. CQS is the highest at 17%.

High yield or no yield

Despite the recent share price gains made by the sector, the three trusts that do pay a dividend still yield between 5.5% and 6.5%.

I’m sure that’s attracting some people to this sector right now, with dividends in decline elsewhere.

There’s hasn’t been much in the way of dividend growth recently:

  • BRWM’s dividend has gone from 21p to 22p since 2014, having dipped as low as 13p at one point;
  • CQS has stayed at 5.6p since 2014; and
  • BlackRock Energy has shrunk from 6p in 2014 to 4p.

All three seem to be on course to pay the same level of dividend over the next year, although BRWM doesn’t seem to have said anything specific in this regard.

As a general rule, those trusts paying a dividend are more invested in the larger resource companies, which often pay out high dividends. The non-dividend-paying trusts tend to favour smaller, more speculative companies.

Let’s round things off with a quick look at each fund:

BlackRock World Mining

BRWM mostly invests in quoted securities, but up to 10% of gross assets may be held in physical metals and up to 20% in unquoted investments.

Six big mining stocks (BHP, Vale, Rio Tinto, Barrick, Newmont, and Anglo American) account for nearly half of its portfolio. By sector, gold and diversified miners account for about a third each, with copper at 18%.

In its recent interim report, the company noted:

For the last few years, we have written about the lengths mining company management teams and Boards have gone to rebuild trust between the companies and their owners, the shareholders. New frameworks were put into place to reduce the chance of poor capital allocation decisions and entrench the businesses into a culture of shareholder driven returns.

The consequence of this was a much more robust business model, where companies have underspent compared to the previous period of extravagance and a more prudent level of balance sheet gearing.

During the last few years, this generated large amounts of free cash flow which was returned to shareholders. This left the sector in the unusual position of being much better prepared for a crisis, which was fortunate given the recent events in the first half of the year.

I think that’s a fair comment from my limited knowledge of the sector. Mining companies do seem a lot better run these days.

Evy Hambro, the manager of BRWM, also runs the popular open-ended BlackRock Gold & General fund. It has £1.8bn in assets and was launched in 1988. Like BRWM, it is up 15% over the last decade, but it has a better record over the last five years, thanks to its greater concentration on gold miners.

CQS Natural Resources

This trust is probably is most well-diversified of this bunch, with over 100 separate investments. Its top 10 accounts for 42%.

Gold is the top theme (25%), followed by copper (13%), shipping (10%), and base metals (9%). It also has 17% in fixed-interest securities/preference shares.

It seems to avoid most of the big names in the mining industry so there is relatively little overlap with BRWM at the individual holding level.

There’s a Quoted Data research note from June 2020 with plenty of extra detail.

BlackRock Energy and Resources Income

BERI’s aim 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 sectors”.

About half its portfolio is in mining, a quarter in energy and a quarter in what it calls energy transition, being the changing nature of both energy supply and energy consumption.

The increased focus on energy transition in the last couple of years spurred a name change in May 2019. The trust was previously called BlackRock Commodities.

BERI is less concentrated than its bigger BlackRock cousin, with some 43% of its portfolio in its top 10 investments.

Golden Prospect

Golden Prospect is the second of three CQS trusts in the sector and is run by two of the three managers who look after CQS Natural Resources (Keith Watson and Robert Crayfourd).

It has 50 investments with the top 10 accounting for 52%. Gold makes up nearly 70% of the fund, with 25% in silver and the balance in platinum group metals and base metals.

Most of the portfolio is in producers, but nearly 40% is in developers and explorers.

Incredibly, its shares are up 226% over the last 5 years yet they are still down over the last decade.

Baker Steel Resources

Baker Steel Resources invests across a variety of mining categories but mainly in early-stage companies. It’s a very concentrated trust with 65% in its top 5 assets and 85% in its top 10.

Gold and silver account for 40% of its portfolio and its charges look pretty outrageous (a 1.75% management fee plus a 15% performance fee).

Here is an August 2020 note from Edison with more details.

Geiger Counter

Geiger Counter is the third CQS trust in this sector and, like Golden Prospect, it’s run by Keith Watson and Robert Crayfourd.

It specialises in uranium, making it the most niche trust of the lot. The uranium price went from $10 in 2003 to over $100 in 2007. It’s around $30 today.

While it has nearly 40 holdings, the top 5 account for nearly 60% of its portfolio. Again, there’s more info at Quoted Data.

Riverstone Energy

Riverstone Energy seems to be a cross between private equity and energy investment with ten investments making up its entire portfolio, mostly in North American shale oil.

Although its shares have nearly trebled from their March COVID capitulation level, they are still down 55% over the past year.

With a 1.5% management fee plus a 20% performance fee, shareholders are getting hit from all sides here.

There’s a continuation vote due by the end of this year, marking the trust’s seventh anniversary:

The vote requires 75 per cent. of the votes cast in favour to pass. The Investment Manager and Cornerstone Investors have 6.7 per cent. and 45.6 per cent., respectively, of the Company’s voting securities and, in aggregate, could block approval.  However, if the vote were passed, both the Investment Manager and Cornerstone Investors would share (83 per cent. / 17 per cent.) an exit fee of twenty times the most recent quarterly Management Fee, plus all accrued Management Fees and any accrued Performance Fees. Based on the Management Fee payable for Q2 2020, this amount would aggregate to $28 million.

If the vote were passed, the Company would be immediately placed into liquidation, a third party liquidator appointed, the Investment Management Agreement immediately terminated and the Company’s shares delisted and no longer capable of being traded.  No further Management or Performance Fees would be payable to the Investment Manager.  If advisable, the liquidator would be able to terminate potential unfunded commitments to portfolio companies alongside the Private Riverstone Funds, which aggregated $96 million at 30 June 2020. Any excess funds could then be distributed to Shareholders.

If the vote is not passed, the Investment Management Agreement will continue in perpetuity. However, either the Board or Shareholders holding in aggregate 10 per cent. of the Company’s voting securities can still call an EGM at any time to vote on the liquidation of the Company (75 per cent. of the votes cast in favour required) or run-off of its portfolio (50 per cent. of the votes cast in favour required). Under both these scenarios, the Investment Manager would still be entitled to twenty times the most recent quarterly Management Fee.

In March 2020, the Investment Manager contacted one of the Cornerstone Investors regarding its voting intentions in respect of the Discontinuation Resolution, but did not receive a firm indication. No Cornerstone Investor has yet expressed how it would intend to vote on the Discontinuation Resolution Vote. As the direction of the EGM vote is not known at this time, there is a material uncertainty.

I can’t see there is any need for an investment trust that treats its shareholders like this.

In summary

The wildly fluctuating fortunes of the gold price over the years sums up the difficulty with knowing where commodity investment trusts might go next.

As I write this, gold is back below the $2,000 level, a bit below its all-time high made in early August.

Despite my brief flirtation with the sector in the past, I was never a gold bug by any stretch of the imagination. I’ve never owned any and I doubt I ever will.

I have some sympathy for the argument that gold can work as part of a diversified portfolio, as it often does well in times of severe economic stress when shares and other assets struggle. You can then use these gains to rebalance.

While it can do extremely well over short periods, like the 65% gain over the last two years, its long-term returns seem more mediocre.

The fact that the gold price was fixed up until the early 1970s means we don’t have as much proper price history as we do for other assets. Sure, you can get a price going back centuries but I’m not sure that helps as the world was so different back then.

Start from 1971 and gold has returned nearly 9% a year in US dollar terms, not that far behind the S&P 500’s 10.5%.

Roll forward just a few years, to make some allowance that a lot of gold’s gains in the early 1970s were adjusting for the fact its price was fixed for so long, and the annual dollar return figure for gold drops to just over 6%. That’s little more than half of the S&P’s 11.8% a year over the same timeframe.

I’m quite happy leaving commodity trusts to those with firmer views on the sector’s wild gyrations. I’ll miss out on some occasional big gains I’m sure, but I’ll also avoid decade-long sideways moves and downward slides.



Please note that I may own some of the investments mentioned above -- you can see my current holdings on my portfolio page.

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6 Replies to “Commodity Investment Trusts Are All The Rage”

  1. Thanks for this. I hold Black Rock World Mining since someone made an off the cuff comment about the miners being low back in 2016. As usual luck rather than judgement means I doubled my money. Steady yield is appreciated but I would never hold a gold fund as I seem to remember I had a Gartmore one back 25 years ago which wound up resulting in just about washing its face.

  2. I tried and failed with one of these in the past, though as it turned out if I’d held on I’d have done quite well – once I made my losses back, I sold as I figured I didn’t understand what I was doing.

    My current thesis is that Miners do well when a) gold is doing well AND b) equities are doing well. Hence the rally this year.

    However if I hold Gold, it would be as a diversification from Equities. While the suggestion is that Gold Miners should be a geared play on this, I’m not convinced it is, and that there’s too much Equity correlation.

    Another issue with the CQS trusts and Baker Steel is that they are tiny, and so horribly illiquid, and presumably with nasty bid-ask spreads. The novice investors having a go at them recently may not have been aware of this.

    Finally, at a time when ESG is ever more trendy (something I’m all for, if done properly and not just ‘Greenwash’), I think there are all sorts of governance and environmental issues with a number of Commodity companies (e.g. CYN has Palm Oil cos, and I can’t remember if they’re the respectable ones. Then there’s issues with mines in West Papua. And so on).

    Separately I’m hoping if the current correction continues, I might have another stab at Smithson (which to my pleasant surprise seems almost like a Stealth ESG fund – a number of the holdings you also see in ‘ethical’ funds).

  3. BWRM (which I hold) has reportedly just been the subject of a highly critical note, and sell recommendation, by Investec. I have not seen the note, only a summary by Nick Sudbury at . He says “It is rare to find such a critical report in respect of a well-established investment trust … [Investec] particularly don’t like the fact that BRWM has recently changed its benchmark to one that has generated a much lower return and effectively backdated the move by largely removing the old one from the investment reports … Personally [says Sudbury] I think they have a very good point. If you want exposure to the mining sector it probably makes sense to use a specialist gold mining fund and then invest directly in diversified stocks like BHP Billiton (LON: BHP) and Rio Tinto (LON: RIO) to broaden it out.“

    I am wondering what to think of this and would welcome others’ thoughts.

  4. Thanks for that info, Adrian.

    I did note the oddly named benchmark for BRWM but didn’t dig into it so that’s useful to know.

    Here’s some explanation from its final results from earlier this year.

    After examining the range of possible ‘all-equity’ reference indices which are based on the mining sector, the Board believes that an index which restricts the size of any one position in line with the UCITS diversification rules would be better aligned to the Portfolio Managers’ belief in the benefits of stock level diversification and the Company’s investment policy.

    The Board has concluded that the MSCI ACWI Metals & Mining 30% Buffer 10/40 Index (MSCI ACWI) would provide a better future reference tool for shareholders. This index is designed to be less concentrated and more diversified than other indices by constraining the exposure to any single issuer to 10% of the index value and the sum of the weights of all securities with weights at more than 5% of the index at 40%.

    The index also has what is referred to as a ‘buffer’ at 30%. The buffer operates to ensure that the index does not have to be rebalanced constantly to retain its diversification characteristics due to the market movement of the index securities. The buffer is applied at the quarterly rebalancing of the index, further limiting the maximum weight of any index security and the sum of weights of larger securities.

    The 30% buffer operates to ensure that the index does not have to be rebalanced constantly to retain its diversification characteristics due to the market movement of the index constituents. The buffer is applied at the quarterly rebalancing of the index taking the maximum weight of any index security to 7% (10% reduced by 30%) and the sum of the weights of securities representing more than 3.5% (5% reduced by 30%) to 28% (40% reduced by 30%).

    If, due to market moves, any security breaches a 9% position, or the sum of all securities over 4.5% breach 36%, (which is equivalent to a 10% buffer applied to the 5 and 40 levels) there is an extraordinary rebalance prior to the quarter end taking the index back to the 30% buffer levels as described.

    The Board also believes the MSCI ACWI is a better-known family of indices, as well as being a broader index than the EMIX, as it includes steel companies.

    That does seem a little odd. BRWM takes a number of large positions in most of the mining giants and then chooses a benchmark which deliberately reduces their weighting!

    I couldn’t find anything obvious comparing the long-term performance of this index to an unrestricted one, though, so it’s difficult to know how much difference this methodology has made to the returns over time.

    But BRWM noted the EMIX Global Mining Index (net return) increased by 22.1% in 2019 but the ‘UCITS capped’ version of the MSCI ACWI Metals & Mining 30% Buffer 10/40 Index (net return) returned 15.3%.

    And in H1 2020, it said the capped index fell 0.5% but the EMIX index rose by 5.7%.

    So it does seem BRWM may be taking the mickey a bit! At least there is no performance fee tied to this new benchmark.

  5. I pretty much bought BRWM around the low point at end of 2015 but it has been pretty up and down quite a bit. I’m probably up around 50% plus divs here so I’m likely to keep it for diversification and inflation hedge. I guess it makes me luck rather than clever

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