For most of the last decade it was fashionable to believe in the “supercycle”, a multi-decade trend of higher commodity prices driven by the rapid pace of Chinese economic growth. Mining companies and other commodity producers performed exceptionally well – for a period. Post the Great Financial Crisis in 2007, the fall from grace has been just as notable. A significant amount of speculative money probably rushed for the exit as things turned nasty. However, there have been underlying problems too. There was a slowdown in Chinese growth, and in addition many commodity firms reinvested profits unwisely or else failed to keep costs under control.
Fund managers in this area have clearly had an uncomfortable ride, and the sector remains out of favour. However, change seems to be underway. Some fund managers have decided to adopt a proactive strategy in dealing with investee companies, lobbying management to improve the way they use shareholder funds. This has included tighter controls on allocating money to new projects and, interestingly, paying dividends to shareholders, something rarely seen from commodity companies.
Evy Hambro and Catherine Raw, both very experienced commodity investors, manage the BlackRock World Mining Investment Trust (LON:BRWM) in just this kind of proactive manner. The investment trust structure also allows the managers to differentiate it from competitors, and we think it now deserves to be looked at in a different light.
Mr Hambro’s team runs around $30bn of assets in natural resources funds, a huge amount, meaning they can exert considerable influence on management decisions – such as how capital is spent, including encouraging it to be returned to its shareholders. In fact the trust increased its own dividend nearly fivefold in 2012, primarily as a result of the pressure placed on company management to spend less on building new mines and more on rewarding shareholders for their patience.
The trust has also made direct investments into commodity projects made by some of its investee companies. The first was an investment into the Marampa iron ore mine in Sierra Leone, operated by London Mining. In return for an investment of about £70m, the trust receives 2% of the mine’s lifetime revenue. More recently, the trust made a relatively small investment in a preference share linked to a gold mining company. These are unique and illiquid investments that could not easily be made by an open ended fund, and…
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