BlackRock trusts in commodities

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In the midst of so much economic and financial uncertainty, the promise of consistent strong performance through both good and troubled times is a particularly attractive proposition. Consistency is not always easy to spot from the performance tables readily available, but it's the cornerstone of the annual investment trust awards from Money Observer, our sister magazine.

Money Observer's 2008 award for best large trust award goes to BlackRock World Mining (BRWM), a giant with more than £1.3 billion under management run by Graham Birch, who was one of the first fund managers to pick up on the likelihood of a commodities super-cycle.

The super-cycle has served him well, and in this case at least it's not difficult to identify the trust's consistently spectacular performance over the past three years; it is the 'runaway winner' out of a universe of 23 large trusts (over £500 million market cap).

According to data from Wins Research, the

trust's net asset value has grown by 24% over the past year to 24 June (19% over the last three months alone), and by a staggering 227% over three years. Share price is up 24% over the past turbulent year, and 217% over three years. Over five years it has increased in value by almost fivefold; in comparison the HSBC Global Mining Index is up 360%.

The trust focuses specifically on companies worldwide with metal and mineral interests, but does not hold oil or energy-related stocks. Birch looks for well-established companies with impressive management teams and strong balance sheets.

Commodities have always been considered a volatile investment prospect, but Birch helps to limit the inherent risks involved in individual mining operations by favouring companies with fingers in a range of resource pies across various different countries.

"This is a very well resourced team - they travel to a lot of sites and know their stocks very well," says Mick Gilligan, director of research at stockbroker Killik & Co. "Another strength is that when the market's looking a bit frothy they often hedge their position by selling options against the portfolio. If you want mining exposure this is a compelling choice." He regards BlackRock's natural resources team as the best in the UK, and one of the best in the world.

Future prospects

But can the trust's record be sustained into the future? As Gilligan points out, it's very much a call on mining stocks, and some commentators maintain that metal prices are peaking. Certainly, the combination of cost pressures and waning levels of global economic growth has made investors edgy, and mining shares have fallen off around 15% over the past month.

But Birch believes the commodities super-cycle has another 10 years at least to run, given the entrenched imbalance between continuing strong demand and slow growth in supply.

"Prices are all relative: they were very cheap six or seven years ago, so nobody invested in new capacity," adds Richard Davis, a senior manager on the BlackRock natural resources team. He says the share prices of many resource companies are already discounting a significant fall in metal prices, so there's plenty of room for an upward re-rating.

Mick Gilligan agrees that the resources run is by no means exhausted yet. "I wouldn't be increasing my weight in the sector now, but I'd make sure I was up to weight in it," he says.

He points out that an additional attraction is the trust's discount, which has widened to more than 14% (against an average of 12%). '"That's a reflection of the market not believing the commodities story in the short term," he observes. "My view is that it still has some way to go in the longer term, so I would say this was something of a buying opportunity for investors looking for exposure to mining stocks."

The full list of winners in this year's Money Observer investment trust awards can be found in July's copy of the magazine. July's Money Observer is on sale at leading newsagents now - priced £4.25.