An Investment Fund for Commodities?

horlicksjan

planteria wrote: »

not necessarily answering your question, but i came out of a general commodities fund. several large, well-diversified miners had done much better than funds holding miners had.....

so i hold:

Glencore Xstrata (i had invested in Xstrata)
Anglo American
Eclectica Agriculture
S&W Global Gold & Resources

Thank you for the suggestion. I am thinking about whether it is better to hold companies instead of funds. As I said in an earlier post my concern was doubling up as I assume I am already exposed to the major companies in my index trackers. But maybe it is still better than funds or ETFs for commodity exposure.

horlicksjan

Taking the advice offered to be cautious of ETFs (I understand now that the fact they constantly need to trade forward contracts and options, means they run up overheads that mean fees can destroy growth). I am reviewing my short list.

Of the three remaining, I am now concerned that the second one (Schroder) may also be a type of ETF or if not, have the same approach and potential issues. I think only the last two seem to invest directly - they use the word 'securities' which I interpret as meaning they hold shares in commodity companies. Is this right? (I have included their fund descriptions in my list below).

So if I want to have commodities exposure in my portfolio, it looks like there is no good way (because ETFs fail) to invest directly in a broad basket that tracks (accurately) the underlying commodity prices. So either I invest in lots of individual companies in metals, agriculture, and mining, or use a fund. The last two on my shortlist are funds.

Any comment on my shortlist and selection welcome! Thank you.

[STRIKE]Source LGIM Commodity Composite ETF (GBP)[/STRIKE] LGCF IE00B4TXPP71
The investment seeks to replicate, net of expenses, the LGIM Commodity Composite Index.

[STRIKE]Schroder AS Commodity A USD Acc[/STRIKE] LU0232504117
The fund’s objective is to generate growth in the long term through investment in commodity related instruments globally.

BlackRock Commodities Income Investment Trust Plc BRCI GB00B0N8MF98
The company aims to achieve an annual dividend target and, over the long term, capital growth by investing primarily in securities of companies operating in the mining and energy sector.

BlackRock World Mining Trust BRWM GB0005774855
To maximize total returns to shareholders through a world-wide portfolio of mining & metal securities. Up to 10% of the assets may be invested in physical metals.

bowlhead99

I'm currently using a combination of JP Morgan Natural Resources and City Natural Resources(CYN) as well as a physical metals ETF.

The JPM holds the likes of Billiton, Rio and Xstrata, while New City's holds a diversified spread of perhaps less famous names (equities and bonds).

CYN's objective is "...to provide shareholders with capital growth and income predominantly from a portfolio of mining and resource equities, and of mining, resource and industrial fixed interest securities." As an investment trust, it uses some gearing (currently at a higher level than either of the Blackrock ones mentioned); I added some yesterday - it's running at c.20% discount to NAV.

webnibbler

Interesting thread this.

There seems to be ongoing debate about the value of holding a specific commodities allocation, particularly in a long term index tracking form. I have JPM Natural Resources and Lyxor ETF (CRBL) making up 8% of my portfolio.

I bought the ETF before really understanding the effect of contango. But IMO it offers diversification benefits rather than a view to providing long term growth prospects. The apparent low correlation between equities and commodities seemed to be demonstrated in the recent rises in equity markets while commodities fell during the first quarter of 2013.

Don't know about the commodity ITs listed above, but many seem to be on significant discount right now.

planteria

just to add, i have Threadneedle Latin America and Neptune Russia and Greater Russia. these, and others you may have/consider, have significant Resources exposure.

horlicksjan

bowlhead99 wrote: »

I'm currently using a combination of JP Morgan Natural Resources and City Natural Resources(CYN) as well as a physical metals ETF.

The JPM holds the likes of Billiton, Rio and Xstrata, while New City's holds a diversified spread of perhaps less famous names (equities and bonds).

CYN's objective is "...to provide shareholders with capital growth and income predominantly from a portfolio of mining and resource equities, and of mining, resource and industrial fixed interest securities." As an investment trust, it uses some gearing (currently at a higher level than either of the Blackrock ones mentioned); I added some yesterday - it's running at c.20% discount to NAV.

Thank you for this. I have looked at the CYN fact sheet. Can anyone clarify what the fund does in simple speak! This is what I think it means...

It has a yield of 6+%. I assume this is a dividend payments the fund pays to fund investors. The yield looks decent, so I assume this is because the fund price has fallen sharply making the yield more attractive at the moment?

It invests in 'fixed interest securities' - this means corporate bonds, yes?

It doesn't actually say this, but does it also invest in the shares of commodity companies?

I can see that in the top 10 holdings there are some energy companies, but a lot of the other top holdings do not seem directly related to commodities:

Top 10 holdings includes
Balfour Beatty
Cable & Wireless
Phoenix Life
House of Fraser
Skipton B Soc.
Direct Line Ins.

I'm a bit confused how much of this fund is exposure to commodities and the underlying price of commodities and how they achieve this?

horlicksjan

...and looking at the Morningstar data they have this Fund listed under 'Category' as 'BP Flexible Bond'. Now I am even more confused how this fits in my portfolio as exposure to commodities? Or is it actually increasing my allocation to bonds?

bowlhead99

The CYN fact sheet doesn't say it's on a 6% yield - more like 3.3-3.5 assuming it pays same as last year (though has a record of increasing). It usually pays 3 small quarterly divs and one larger final one.

Not sure where you are looking for those top 10 holdings. Mostly it is investing in equities of resources/ commodities companies. As it is trying to pay a relatively higher yield than you would get from a pure growth-focussed pile of resources businesses, it does have 25-30% fixed-interest : bonds or preference shares of mostly resource or industrials businesses, and some financials.

You are right that the "fixed interest" refers to corporate bonds or preference shares, generally higher yield ones.
It does have Balfour Beatty pref shares (at least it did at December interim half-yearly report, but it was outside the top 70 investments then and the monthly factsheets only reveal top 20). And Skipton prefs (1.4% of gross assets now, marginally up from 1.3% at the December interim report). But I don't know where your data is from, something is up.

If you look at the manager's website, you can get the interim report mentioned from December which shows you the wide diversification they have in commodities companies: http://ncim.co.uk/reports/CNR_Interim_Main_Dec_2012.pdf
There are some pretty graphs and the detailed list of holdings starts on pg10(pg 12 of pdf). The annual reports are more detailed than the semiannual interim ones, but the June annual one won't come out until October, so for now you have to make do with the monthly factsheet (31 May 2013 is the most recent one available -also available on the NCIM.co.uk site).

horlicksjan

bowlhead99 wrote: »

The CYN fact sheet doesn't say it's on a 6% yield - more like 3.3-3.5 assuming it pays same as last year (though has a record of increasing). It usually pays 3 small quarterly divs and one larger final one.

Not sure where you are looking for those top 10 holdings. Mostly it is investing in equities of resources/ commodities companies. As it is trying to pay a relatively higher yield than you would get from a pure growth-focussed pile of resources businesses, it does have 25-30% fixed-interest : bonds or preference shares of mostly resource or industrials businesses, and some financials.

You are right that the "fixed interest" refers to corporate bonds or preference shares, generally higher yield ones.
It does have Balfour Beatty pref shares (at least it did at December interim half-yearly report, but it was outside the top 70 investments then and the monthly factsheets only reveal top 20). And Skipton prefs (1.4% of gross assets now, marginally up from 1.3% at the December interim report). But I don't know where your data is from, something is up.

If you look at the manager's website, you can get the interim report mentioned from December which shows you the wide diversification they have in commodities companies: http://ncim.co.uk/reports/CNR_Interim_Main_Dec_2012.pdf
There are some pretty graphs and the detailed list of holdings starts on pg10(pg 12 of pdf). The annual reports are more detailed than the semiannual interim ones, but the June annual one won't come out until October, so for now you have to make do with the monthly factsheet (31 May 2013 is the most recent one available -also available on the NCIM.co.uk site).

I think I have found the correct fund now - City Natural Resources High Yield Trust plc CYN. I see now.

I was looking at New City High Yield Fund Ltd NCYF JE00B1LZS514. I had then shortlisted it for my commodities exposure uncorrelated to the main stocks index funds. But I am not now so sure it is in fact exposure to commodities or what that is?!
Morning star categorise it as a 'BP Flexible Bond' and the fund objectives are 'a high gross dividend yield and the potential for capital growth by investing in high yielding fixed interest securities.'

If anyone can explain what this fund is in simple terms that would be nice.

Both City Natural Resources High Yield Trust plc CYN and New City High Yield Fund Ltd NCYF have dropped sharply and are down sharply again today. So are they both in asset classes correlated to each other, but uncorrelated to stocks (which are slightly up today)?

bowlhead99

As explained, CYN is natural resources (commodities exposure), mainly equities with a high yield twist from some of the fixed interest it holds; those bits and pieces of fixed interest it holds are partially in resources businesses and partially in industrials or financials.

Most of what it holds is not fixed interest and so the yield is not as high as a proper high yield fund, it's just higher-yielding than if it had been only holding its commodity company equities.
----

NCYF is a different animal and should not be on your list for commodities exposure.You probably made a mistake noting it down when someone in fact had suggested the one above. All it has in common with the above-mentioned fund is the fact it has "high yield" in the name and is managed by New City. It buys, holds and sometimes sells high yield bonds or preference shares or convertibles, and hopes to grow a bit but mainly generate a good yield.

In this respect (i.e., aiming to generate a high yield from mostly fixed-interest stuff and pay good distributions, rather than owning equities and perhaps getting more growth in good years at the expense of income), NCYF is a different beast to a general equity fund, so its movements won't be completely correlated.

However, unlike an "investment grade" bond fund, it is *not* investing in super safe low-interest bonds to get 2 or 3%. It is deliberately buying bonds and similar instruments in companies which are not super safe, super low-credit-risk companies, it wants the ones which it thinks will give a higher reward for the risk. The problem with doing this is that those riskier companies are ones which have been assessed by the market as more likely to default.

Therefore in turbulent equity markets, despite usually having a solid income, you might expect high yield funds to fall in value as companies paying back their loan interest are more likely to go bust in dodgy economic times. And when markets are going up and everyone is happier, they will likely go up too.

So, high-yield bonds like the ones held by NCYF have some characteristics in common with equities (go up a bit in good equity markets and down a bit in bad) and they also have some characteristics in common with other lower-yield fixed interest bonds (are more valuable when prevailing interest rates and inflation are low, and less valuable when rates are high).


So in summary NCYF is a high yield bond fund investing in bonds of different industries, and CYN is a natural resources fund which also happens to have some high yield bonds focussed in the natural resources sector and some in other sectors. Neither are going to move up and down at the same time or same rate as a straight equities fund nor a straight low-yield bond fund nor necessarily each other.

Doesn't mean they can't move the same distance and direction on the same day, as they will of course be influenced by global events - reduction of QE in developed markets and china at the same time, isn't good news in the short term for either of them.