The BlackRock World Mining (BRWM) team has faced a currency headwind for much of this year and this has eaten away at some of their returns, particularly to dividends. While the underlying companies themselves have been delivering, and the structural reforms translating through into better performance, the strength of sterling has been an issue. Gold shares have finally started to outperform the gold price once again – a trend that had disconnected for some time.
In the last few weeks, weaker economic data from China has had an impact on markets, as well as the iron ore price which is sensitive to Chinese production levels. BHP Billiton (BLT), which makes up 10% of the trust, has also disappointed because it failed to announce a share buyback, contrary to analysts’ expectations.
The very nature of the fund’s investment remit means it’s prone to high volatility at times and this was clearly on display last year. Further, the fund’s structural underweight in the index heavyweights such as BHP Billiton for risk management reasons and to gold for diversification reasons adds further sensitivities that can – and did – affect performance. While the underweight to gold helped insofar as the gold price collapsed in the first part of this year, the gold miners fell even further. Although underweight, it was still painful in absolute terms.
Managers Evy Hambro and Catherine Raw stuck with their process throughout and we like the consistency with which this process has been applied over the years – indeed, it has paid off again thus far in 2014. They blend top-down macro considerations with bottom-up fundamentals well. They consider the outlook for commodity prices as well as the companies, and meeting management is an important step in the process. Indeed, the latter has been an area on which they have worked hard in the last two years to encourage better corporate behaviour, and in the mining space in particular this is now bearing fruit; the setback in commodity prices has forced some changes as the commodity prices are now much closer to the cost of production, leading to the need for better cost control.
Our conviction in the fund’s management team is intact, too: Their deep knowledge and experience in this sector puts them head and shoulders above most peers, in our view. We also like the opportune use of the closed-end structure; in mid-2012 the managers purchased a 2% royalty from an iron ore mine operated by London Mining (LOND) and this has since been supplemented by another with Avanco Resources (AVB), primarily on their production of gold but also on copper. This should enhance the trust’s income over time, as well as bring diversification. These transactions have been partly financed by the loan facility and thus added some gearing, but the managers have ensured they keep overall gearing in line with their market views.
