Oil/mining/gold: Managers reveal how their commodities allocation has changed in 2016

Hardeep Tawakley  Hardeep Tawakley
clock • 10 min read

Following the global rout in commodities in 2015, managers are rotating back to oil, mining and precious metals this year via a range of vehicles such as ETFs, investment trusts and MPLs.

innes-johnJohn Innes, portfolio manager, RWC UK Focus fund

Rebuilding oil COS positions

The natural resource sectors have been dramatic underperformers over the past few years. This has given a significant relative performance boost to those funds that have structural biases away from the area.

Our investment philosophy is more flexible. In 2014, we materially reduced the portfolio exposure to oil companies in particular, as the oil price seemed unsustainably high given the massive increase in US production. In late 2015 and early 2016, however, we have been significantly rebuilding positions.

This is only done through individual stock holdings and our investment process favours the more unfashionable companies. This includes Shell, following the takeover of British Gas, BHP after its severe de-rating on the back of low commodity prices and the Brazilian mining disaster, and Glencore, subsequent to its rescue share issue and director share purchases.

rayner-anthony-mitonAnthony Rayner, fund manager, Miton multi-asset team

Gold ETF

We have been adding to our gold exposure this year, having reinitiated a position in November 2015, when the metal started to tick a number of boxes for us.

Firstly, it started to behave like a safe haven, so on off days for equities, it provided some protection to the funds. Secondly, the opportunity cost of holding gold fell versus other 'safe havens', as some government bonds moved into negative yield territory. Thirdly, if central bank credibility is increasingly questioned, gold should find favour.

We took this position through a physically-backed ETF, where each share corresponds with some gold in a vault, rather than a paper-backed ETF, where shares are backed by futures contracts, as opposed to the metal itself. We have avoided the 'synthetic' version, as it is more complex.

mcgrath-tom2Tom McGrath, fund manager, 8AM Global

BlackRock World Mining IT

The 8AM Global Focused fund began the year with a zero percent direct allocation to the commodities sector, but following the rout in 2015, valuations became sufficiently attractive for us to take a position of around 7% in the BlackRock World Mining investment trust in February 2016.

This fund, which is currently around 10% geared, gives us a diversified exposure to mining and metal securities, including big names such as Rio Tinto, BHP Billiton and Fresnillo, and is run by an experienced team with the necessary expertise to finesse investment in this volatile sector.

Previously, we have used open-ended collectives or ETFs to invest in this sector but with the fund trading on around 15% discount to NAV, we may well see a closing of the discount if the rally continues. Following the recovery this year of some 40%, we have taken some profits but still see upside potential.

inglis-jones-james-2016James Inglis-Jones, fund manager, Liontrust cashflow solution team

Long energy/mining stocks

We have been building long exposure to energy stocks and, more recently, mining companies as we believe they represent compelling value at these levels. Recently added positions include Tullow Oil, Soco, Total, Evraz and BHP Billiton.

In a general environment of quite small differences in stock valuations, the mining and energy sectors stand out in contrast to this general picture. They are showing evidence of significant investor concern, reflected in the very wide range of valuations on offer as investors shun risk in these sectors and embrace defensiveness.

This tells us there is likely to be a very good long-term contrarian value opportunity. We view any shorts in the sector with great caution.

lennon-stephen-2015Stephen Lennon, investment manager, Parmenion

Soft commodity exposure via ETFs

While Parmenion does not have an explicit allocation to commodities in its portfolios, the precipitous falls in value across hard and soft commodities over the past three years is raising the interest of many investors.

Energy and oil is the talk of the town, although softs have also suffered and are down circa 34% over the same period. The recent El Niño event was one of the worst on record and may well have a meaningful impact on the supply and demand dynamics of soft commodities. Therefore, now may be a good time to add some exposure here for the brave investor.

Soft commodities can be accessed via ETFs which aim to track the futures indices and so one must be comfortable with the derivative exposure and the liquidity of the ETF itself. Alternatively, some open-ended funds offer access to agribusiness shares, although these provide less diversification benefits.

nevins-solomon-2016Solomon Nevins, investment manager, Architas

Energy MLPs

The main change we have made in our commodities allocation is to increase our exposure to the energy sector. We have done this through energy master limited partnership structures (MLPs), which offer good yield potential.

Specifically, we have used the PIMCO GIS MLP & Energy Infrastructure fund, which offers access to the growth in North American energy production without being directly exposed to commodity prices.

The underlying businesses operate processing and storage services between oil wells and oil refineries. They are typically paid on volume that passes through their facilities, often on long duration guaranteed contracts. This means they are not as sensitive to changes in the oil price.

Despite this cushioning from the oil price, the sector has sold off heavily. We do not believe this is justified and feel there is a valuation opportunity.

PIMCO's value-add is their credit analysis expertise. They understand the nature of each pipeline contract, the cashflows generated, the strength of the counterparty and the balance sheet. This gives them an edge in an asset class that is not widely covered by analysts and tends to be dominated by yield-hungry, analysis-shy retail investors.

Which commodities are best placed for a 2016 rebound

marino-valensise-grey-background-hi-resMarino Valensise, head of the multi-asset group, Baring AM

Gold and silver allocations

In January, when gold was trading at $1,090, our multi-asset team added a 3% allocation to sterling-denominated portfolios, with exposure gained via a physical gold exchange-traded fund.

The renaissance of gold in a world of flat currencies, negative yields, and anxieties over economic growth is strong. When countries are trying to depreciate their currencies, and in a world where assets might be exhibiting a higher correlation, what can be done to diversify?

From a portfolio perspective, precious metals can play a significant role by acting as a diversifier against equities, both in case of negative rates and very low inflation, and in case the inflation genie were to escape from the lamp as a consequence of extreme monetary easing.

The recent price correction in silver has also provided a good buying opportunity. Gold and silver are correlated, but silver has many more industrial applications and offers attractive dynamics. Supply should also shrink, since some of the copper and zinc mines which also produce silver will be shut.

For many years, the price of silver has fallen by more than the price of gold, so our belief is if the long-term bear trend ends, the price of silver could rise aggressively.

o-nolan-kevin-2016Kevin O'Nolan, portfolio manager, Fidelity Solutions

No change

We have made no changes to our commodity exposure in 2016, retaining our small positive view on the asset class.

This is expressed through an overweight to the energy equity sector. We have a neutral view on the commodity asset class.

Oil is the single most important commodity given its weight within the index, and because it acts as a major input in the production of other commodities.

We expect the supply/demand balance for oil to come into line over the next six months, with companies having cut back aggressively on capital expenditure.

However, with inventories still rising, we believe the recent bounce in broad commodity prices is likely to prove short-lived. Our commodity exposure comes through derivatives, which provide us with efficient and cost effective access.

harris-mark-cityfinancial-2015Mark Harris, head of multi asset, City Financial

Reallocating to sector

By the end of 2015, our research showed investor positioning had become very stretched in favour of the US dollar and related trades. By contrast, commodities and other beneficiaries of a weaker US dollar were broadly overlooked and appeared cheap.

We felt the fragility of global economic growth would force the US Federal Reserve to pare its ambitious interest rate expectations over 2016 and cause a sharp reversal of the crowded dollar positioning.

Therefore, we started to build commodity exposure over January, focusing mainly upon oil, as most of our managers were underweight energy. The position has been very helpful in the recent rebound.

We concentrated initially on UCITS-eligible products focusing directly on the underlying commodity as it had been highly correlated to equities and we felt it would outperform equities in the initial rally phase.

While the trade may now be overbought in the short term, we believe the dovish message from the Fed in March is sufficient to reduce short-term market risks and underpin a period of very strong performance from commodities.

This may exacerbate inflationary fears and force the central bank to tighten rates but, in the meantime, we anticipate further upside and will look for opportunities to capture this through resource-related plays.

assad-abdulla-2016Assad Abdulla, director, Signia Wealth

Gold focus

An allocation to gold offers a favourable risk/reward in this uncertain environment.

The US dollar was weaker after the FOMC meeting this month. The crowded trade of being long US dollar (due to the perceived policy divergence between central banks) is an investment thesis that has recently been called into question; partly due to lower inflation readings in some parts of the world and weak global growth.

This dollar weakness has been a positive for the gold price.

Inflation data in the US has surprised to the upside however, and this is another positive for gold. Gold acts as an event hedge during periods of geopolitical tensions and crisis.

We have gained exposure to this commodity using an XAU forward contract, which offers a clean pay off in US dollars at close of the contract.

viljoen-ruli-2016Ruli Viljoen, head of manager selection, EMEA, Morningstar Investment Management

Quality bias

We have made relatively few changes to our allocation to commodities this year. We are generally cautious on the outlook for commodities due to continued challenges on the supply side, and to this end we are being selective.

We have found value in the energy complex, with a particular focus on European energy. We use active managers as the fundamental stress in the sector supports selectivity, although where we can we have used vehicles such as ETFs to emphasise Europe particularly.

For investors unable or unwilling to make the choice within the broader sector we would recommend selecting a manager that has a quality bias, such as the First State Global Resources fund.

While the fund may lag in a rally, it should offer investors relative protection on the downside too.

seager-scott-benBen Seager-Scott, investment strategy director, Tilney Bestinvest

Still wary of commodities

We continue to be wary of the broad commodity complex. Although commodity prices have fallen a long way, they still face the double-whammy of a weakening demand outlook and persistent oversupply, the latter driven partially by geopolitical issues.

There is also little incentive for large producers with cheap means of extraction to reduce capacity, since they can benefit on a strategic basis by squeezing smaller, leveraged companies with higher production costs then snapping up these assets on the cheap.

One notable change, however, has been to recently increase our exposure to gold - specifically physical gold, accessed through an ETC.

Although certainly not the 'safe haven' many mistakenly take it to be, it has low correlation with equities and bonds, which we believe have been driven up together by central bank activity. It could also be used as a store-of-wealth refuge if we start seeing global competitive currency devaluation, which we see as a growing risk. 

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