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Even yield appeal can't lift BlackRock Commodities Income – Citywire.co.uk

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Investors in BlackRock Commodities Income (BRCI) are enduring a tough 2017. The £84 million fund, focused on the energy and mining sectors, is one of the worst performing investment trusts since the turn of the year, with the shares down 16.8%.

Even the trust’s income appeal appears to be doing little to attract investors. While the trust’s full year payout is set to fall to 4p, from 5p in 2016 and 6p the year before, that still places the shares on a yield of 5.6%.

No other commodities trust can rival that, but it’s partly a product of the shares sliding to 7.2% discount to net asset value, below the 2.6% average discount of the last 12 months.

Hurting performance at the beginning of the year was the trust’s tilt towards energy stocks. Buoyed by the optimism surrounding the oil price following the Opec cartel of oil-producing countries’ production cuts agreed last September, managers Olivia Markham and Tom Holl were holding 51.1% in energy stocks and 48.9% in mining companies at the end of November last year.

But stronger production levels from Libya and Nigeria as well as a resurgence in US shale production derailed the oil price rally, with Opec’s extension of its deal in May doing little to prop up the price of crude.

‘Following the initial market optimism on the deal, the energy sector fell over 5% to the end of February, whereas the mining sector closed up 10% over the same period,’ said the managers in their half-year report released last week.

Markham and Holl have doubled down on their bet on energy stocks, selling some of their mining holdings as they rallied and investing the money in oil and gas firms.

‘During the first half, energy equities performed poorly relative to the move in the underlying oil price with a number of US explorers and producers (E&P) falling by 20% to 40%,’ they said.

‘In our view, these companies are now trading well below medium-term fair value and therefore offer an attractive investment opportunity over the next one-to-two years as the fundamentals for the oil price improve and the market recognises the long-term value in companies with high quality assets.’

The managers acknowledged the US E&P companies they had been buying lacked the dividend appeal of major producers like Shell (RDSb).

But the payouts the managers receive from holdings has played second fiddle to option writing in generating dividends for shareholders. Over the six months to the end of May, the trust received £2 million in income from option writing, ahead of the £1.6 million in dividends from holdings over the same period.

Dividend income should, however, receive a boost from the portfolio’s contingent of miners, according to the managers. ‘The key theme from the mining sector’s 2016 year-end reports was the improvement in free cash flow from higher commodity prices and reduced spending on new projects,’ they said.

‘We see the mining sector remaining in capital return mode for the next couple of years, which bodes well for dividends across the sector and should also underpin limited growth in the supply of most mined commodities in the near future.’

Investors will be hoping that trend can help reverse some of the dividend cuts of recent years, and help the shares rerate. But analysts at Numis believe better opportunities exit elsewhere.

‘In our view, BlackRock World Mining (BRWM) is a better alternative for investors seeking exposure to a recovery in mining shares, while we believe Riverstone Energy (RSE) offers well-managed exposure to oil and gas, through a focus on unquoted E&P stocks,’ they said.