BlackRock Commodities Income (BRCI) has a conviction-led approach to delivering a high income from the global mining and energy sectors. The shares currently yield 5.7%, considerably more than funds exposed to many other areas of the market. The managers have flexibility to invest in equities and fixed income to generate this income. With the top ten holdings currently accounting for 51% of total assets, relative to most equity funds it can be considered highly concentrated.
Managed by Olivia Markham and Tom Holl, BRCI typically has a roughly even split between mining and energy stocks. Reflecting the income mandate as well as the current outlook of the managers, a significant proportion of the trust is invested in the larger, diversified companies within each sector. The managers believe that within both of these sectors, diversified mega-caps are hugely cash-generative at current commodity price levels. With solid balance sheets and management focused on shareholders, they seem set fair for dividend hungry investors.
BRCI’s objectives are to achieve both an annual dividend target and, over the long term, capital growth. The board considers a “reference index”, of 50% EMIX Global Mining and 50% MSCI World Energy Index to compare performance, but does not see it as a benchmark, given the high-income mandate of the trust. Over the longer term, during what has been a severely volatile time for mining and energy companies, the trust has not kept pace with the reference index. 2018 started very positively, with the managers generating significant outperformance of the reference index, only to see worries of a China slow down and trade wars, erode it. BRCI has started 2019 in a positive manner, with the NAV + 1.9% at the time of writing, outperforming the AIC peer group which is -0.6% in NAV terms.
Income has been (and continues to be) a major focus for the managers and board. However, the trust was not insulated from the dividend cuts experienced by the sector, and the board reduced the dividend from 6p paid in 2015 to the current level of 4p. In the recently published annual results, the board has renewed its commitment to targeting 4p for the financial year ending 30th November 2019.
As at the end of November 2018, revenue reserves stood at 0.6X the current 4p annual dividend level. The board has stated that it will look to protect any future shortfall in earnings with revenue or capital reserves, which in our mind indicates that the dividend yield of 5.7% looks relatively secure. At this level, the trust yields considerably more than most other areas of the market - Global Equity Income investment trusts for example yield 4.1%.
The managers continue to be optimistic in their outlook for the energy and mining sectors, believing 2019 will continue to see high levels of free cash flow translating into strong dividend payments. The fact that both the energy and mining sectors are under-owned by institutional investors gives the managers hope that once confidence on the global economy returns, investors will benefit from a rerating.
The shares trade at a discount of 5.3% at the time of writing, and over the past ten years the shares have rarely looked cheaper relative to their own discount history. Yielding 5.7%, BRCI continues to be an attractive and differentiated source of income for a portfolio.
|Discount of 5.3% looks anomalous for a trust with such a high yield
||Relatively small trust
|High income, with dividend backed by a committed board
||Unlikely to perform well if global economy tips into recession
|Defensive and broadly spread portfolio, managed by specialist team
||Strong sterling could undo any earnings growth from underlying portfolio