As a predominately U.K.-focused investor, the natural resources sectors are important to me. Together, right now Basic Resources and Energy have about a 20% weighting in the FTSE 100. Over my investing career, these two sectors have usually been between 20% and 30% of the index. Given my interest in commodity markets and the interplay with macroeconomics and geopolitics, naturally I follow these sectors quite closely.
BlackRock Inc. (BLK, Financial) has two listed funds in London that I pay attention to because the fund managers are highly experienced and well respected, especially Evy Hambro, who is a guru in his own right and the manager of the BlackRock World Mining Trust plc (LSE:BRWM, Financial). The other fund is the BlackRock Energy and Resources Income Trust plc (LSE:BERI, Financial). Together these funds manage nearly $2 billion in assets.
Each fund recently released a portfolio update which gives a breakdown of positions and exposures. Starting with the World Mining Trust, its top four positions are as follows: Vale (VALE, Financial) with 8.3% of the portfolio, BHP Group plc (LSE:BHP, Financial) with 7.5%, Glencore plc (LSE:GLEN, Financial) with 7.5% and Anglo American plc (LSE:AAL, Financial) with 7.3%. These are clearly large global diversified players, but perhaps more interestingly, the fund has quite a large exposure to copper at 21.2% overall.
Hambro writes:
"We believe the outlook for mined commodity prices remains robust, whilst mining shares offer attractive value. Recovering global economic growth, accommodative monetary policy, rising government spending and increased focused on green capital investment all point towards strong demand. Meanwhile, supply is constrained following years of capital discipline from the producers and we are seeing no signs that this is set to change.
We are encouraged by what we are hearing from management teams in terms of maintaining their focus on capital discipline. Longer-term, ill-discipline remains a risk but, regardless, increases in capital expenditure would take some time to feed through into new supply given the time-lags associated with mining projects. We are also seeing inflationary data increase and commodities have traditionally been a core way for investors to both protect themselves from this but also benefit from such trends.
We believe the best risk-adjusted opportunity today is in the shares of mining companies in robust financial positions with strong balance sheets and high levels of free cash flow. Mining companies are continuing to return capital to shareholders through dividends and buybacks."
Source: BlackRock World Mining Trust plc, Portfolio Update, January 2022
The Energy and Resources Income Trust is perhaps more interesting because it has leeway to invest across both mining and energy. It’s current portfolio exposure is as follows:
- Mining 44.8%
- Traditional Energy 32.8%
- Energy Transition 23.4%
- Net Current Liabilities -1.0%.
Mining and Traditional Energy are made up of the usual sub-sectors: Diversified Mining, E&P, Integrated, etc., but the Energy Transition breakdown is instructive. The Energy Transition part of the portfolio can be further broken down as follows:
- Energy Efficiency 10%
- Electrification 7.2%
- Renewables 3.6%
- Transport 2.6%.
So, when a traditional natural resources investor has nearly a quarter of its fund invested in Energy Transition names, that tells me Traditional Energy companies are not just battling energy commodity prices, but they are really competing for investment dollars even from their most loyal investors!
Still, the Energy and Resources Income Trust’s top holdings are as follows: Vale with 7.2%, Glencore with 6.4%, BHP Group with 5% and Chevron (CVX, Financial) with 4.5%. Other top energy holdings include ConocoPhillips (COP, Financial) with 2.7% and Enel (MIL:ENEL, Financial) with 2.2%.
It’s no surprise the top mining positions are overlapping, as no doubt the two funds share the same mining analysts.
Fund manager Tom Holl wrote:
"Within the energy transition theme, the International Energy Agenda (IEA) expected 2021 to be a record year for renewable power installations with c.290GW of installations, following 2020’s record installations. The IEA forecast an acceleration in renewable capacity in the next five years given stronger policy support and recently announced climate targets at COP26. Current annual installations of renewable power are estimated to be around half of the level required to meet the 2050 net zero targets for carbon emissions. Elsewhere, Plug-in electric vehicle sales have accelerated in 2021, despite previously flagged supply chain shortages, with sales to end November of 5.8 million vehicles compared with 3.1 million vehicles sold for all of 2020."
Source: BlackRock Energy and Resources Income Trust plc, Portfolio Update, January 2022
Obviously, these funds are highly cyclical, but the overall make up of the portfolios is quite “risk-on” given the low holdings of gold miners and a higher weighting in E&P over Integrated in Traditional Energy.
With the discussion of renewable power and the exposure to Electrification and Renewables, it’s clear to me that the electric utility and energy industries are merging together. This bodes well for copper prices, and that’s why I’m long both Glencore and Anglo American.
