Comments on: Commodity Investment Trusts Are All The Rage

By: ITinvestor

ITinvestor — Tue, 13 Apr 2021 08:32:20 +0000

Mini-update: According to the AIC, the commodity sector has been the best performing IT sector over the year to April 2021. More details in this press release…
https://www.theaic.co.uk/aic/news/press-releases/dramatic-turnaround-for-commodities-natural-resources-sector

By: Alan Porteous

Alan Porteous — Thu, 10 Sep 2020 18:07:52 +0000

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

By: ITinvestor

ITinvestor — Sat, 05 Sep 2020 12:30:19 +0000

In reply to Adrian Fletcher.

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.

By: Adrian Fletcher

Adrian Fletcher — Sat, 05 Sep 2020 07:22:08 +0000

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 masterinvestor.co.uk . 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.

By: tom_grlla

tom_grlla — Fri, 04 Sep 2020 15:50:14 +0000

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).

By: J

Thu, 03 Sep 2020 13:46:26 +0000

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.