Face off: BlackRock Gold & General vs BlackRock World Mining Trust

Commodity funds have been seen as the investment choice of the market bull. They beat markets on the way up, but then suffer as sentiment turns, but can prove profitable for those who can stand the ride.

The biggest name in commodities has been BlackRock, with one of the most established teams in the business and around £15 billion under management.

Two of the largest and most popular funds in the BlackRock stable are the Gold & General fund and the World Mining investment trust. They are run by the same managers, so this battle is more Cain and Abel than David and Goliath.

The two funds are also trying to do slightly different things. Although they are run from the same process and research engine, BlackRock Gold & General, as its name suggests, is principally trying to profit from investment in gold equities. As such it is substantially exposed to fluctuations in the gold price. BlackRock World Mining invests in general mining companies that may be exposed to various commodities from steel to copper, and is therefore likely to follow a more traditional commodities performance cycle.

The funds are run by the experienced duo of Evy Hambro and Catherine Raw. However, much of the historic strong performance was built under the stewardship of Graham Birch, who left the group in 1999 to spend more time on his dairy farm in Dorset. His departure has coincided with a period of more erratic performance. Both managers have a strong pedigree and had worked alongside Birch for many years, but have been operating in a far more difficult environment.

All the group's funds are run with the same process, which takes in an assessment of the supply/demand characteristics of each individual commodity, plus an analysis of the individual companies, which will incorporate an analysis of the geographic region in which they operate and a comparison of valuation relative to peer group.

Raw says: "At the first stage we are deciding whether we would be, for example, overweight copper or underweight zinc. It takes in our view of the US economy, eurozone issues or the strength of China, which will all influence the demand side for commodities. Then we look at the supply side. We look at this from both a long- (three to five years) and short-term perspective."

From there, the managers look at individual companies. For this, they will examine the quality of the asset base of a company, the quality of the management and any political risk from the country in which they operate. This will also take in an assessment of relative valuations. Raw adds: "New opportunities will tend to be in riskier countries, while companies in "safer" jurisdictions will have higher valuations. We have to balance the two.

"The final step will be portfolio construction and ensuring the fund is not excessively concentrated in a single country, or single commodity."

With that in mind, let the sibling rivalry begin.

BlackRock Gold & General

At nearly £3 billion, the Gold & General fund is one of the fund industry's big beasts. It is primarily a fund exposed to the shares of gold producers. Although the managers have the flexibility to move exposure up and down according to their view on the likely direction of the gold price, a minimum of 70% of the fund will be invested in gold equities with the remainder in precious metals.

Correlation to the gold price is high, around 0.8 over five years, according to Raw, but while the gold price saw a steady rise over the five years to the end of 2011, the Gold & General fund has been more volatile. The fund is up 62.8% over five years. The gold price has more than doubled over the same time frame. Gold equities have generally not kept pace with the soaring gold price.

Raw adds: "There are certain aspects that are not correlated. If you look at the last 10 years of our portfolio, there are only two discrete years where the fund has not outperformed the gold price - 2008 and 2011. This is when the 'equity' side of gold equities has been more important. There has been a general sell-off in equity markets, which has weighed on gold companies."

Raw says that her job is to identify good companies that will deliver a stronger performance than the gold price. She wants to see that management can keep costs under control, so that the producers benefit significantly when gold rises.

She says that the dilemma for gold investors at the moment is that the larger mines in more stable jurisdictions such as South Africa and Australia are struggling to grow production. Also, the equities tend to be more highly prized than those in more "difficult" jurisdictions, such as other parts of Africa, and therefore trade on higher valuations. She says that investors need to be in those countries and companies that can increase production. The group is keeping the fund's gold exposure relatively high.

Although the team does not take a view on the absolute level of the gold price, it does predict whether it will be higher or lower. In the 1990s, the group had much higher "other" exposure in the portfolio, believing the gold price was likely to fall on a three- to five-year view.

Right now, they believe that gold has a number of supportive factors - an uncertain world, in which those with wealth want to keep it rather than necessarily increase it, plus a high risk of inflation. "The biggest threat to the gold price is that interest rates turn positive in real terms, rising ahead of inflation. We don't think it's a significant risk - the Bank of England has been promising inflation at 2% for four years and it hasn't achieved it."

The gold price is currently around 10% off its 12-month highs, which may provide an opportunity to reinvest for those who believe in the long-term story for gold.

BlackRock World Mining Trust

BlackRock World Mining is also a giant in its sector at £1.4 billion. The closed-end structure has proved useful, allowing the managers to invest in smaller, more illiquid names, take a long-term view and gear into rising markets, all of which have contributed to performance in this volatile asset class.

The group runs an offshore open-ended equivalent, which has performed significantly worse than the closed-end version, losing more in weak markets and gaining less in stronger markets.

Raw agrees that the closed-end structure has some handy tools: "It allows us to gear and therefore be opportunistic about areas that may have had a bad run and look set to bounce back. It also means that we can arbitrage the cost of borrowing. We can take on some fixed-income exposure and generate income from companies paying dividends, generating a yield of 5-6%. Our cost of borrowing is far lower."

Mick Gilligan, head of research at Killik & Co, says this income focus could provide an important catalyst for the discount on the trust (currently 11%) to narrow: "There have been a number of changes to the way the trust can allocate between capital and income. This frees up the managers to pay a higher income. This should ensure a better rating. The discount has already moved in and there is further room for it to contract."

Raw believes that the closed-end structure also allows a longer-term investment horizon, adding: "It is not filled with small and illiquid companies, but it is more likely to be companies where the share price growth takes longer to come through." This has been shown in performance, which has been "lumpy", but strong over three years, up 104%. For the most part it has performed approximately in line with the wider commodities and natural resources IT sector, but it showed significant outperformance in 2009 and underperformance in 2008 and 2011.

Although Raw and Hambro aim to be selective in their exposure, the trust will always be exposed to the fortunes of the economically-sensitive mining sector. Kerry Nelson, a financial adviser at Nexus IFA, says: "It is very volatile and investors have to pick their moment - look at what is going on in the wider economic climate. Mining is a very specific allocation in a portfolio."

She believes that the trust is likely to do well if the economic climate improves.

The verdict

The team has plenty of experience, but the departure of Graham Birch has coincided with more uneven performance. This may, however, be due to the more difficult market conditions seen since the credit crunch.

The World Mining Trust offers generalised commodity exposure and, as such, can be volatile, but the investment trust structure has helped the managers deliver better performance than its open-ended equivalent and the new income structure may narrow the discount.

Nelson believes the Gold & General fund is a "steady-eddy" diversifier that is unlikely to see the big swings of a pure mining fund. Gold & General is a buy-and-hold investment, the World Mining Trust is for those feeling bullish about the market environment.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.