Will some sectors (Commodities, Far East & Emerging Markets) Recover?


#1

Looking at my portfolio I’m wondering whether to have a clear out of some poorly performing sectors and invest in those that are doing better. This could be case of selling low and buying high so I’m in too minds about it.

So do people think that any of these sectors will improve in the short to medium term

  • Commodities
  • Asia Pacific excluding Japan
  • Emerging Markets

The trusts that I’m thinking about clearing out are

Commodities
City Natural Resources (CYN)
Blackrock Commodities Income (BRCI)
Blackrock Wold Mining (BRWM)

Asia Pacific excluding Japan
Aberdeen Asian Income (AAIF)
Aberdeen Asian Smaller (AAS)
Aberdeen New Thai (ANW)

Emerging Markets
Templeton Emerging Markets (TEM)
JP Morgan Emerging (JMG)
JP Russian Securities (JRS)

I’ve held some of the trusts for a long time and allowing for buying and selling along the way and dividends - I won’t necessarily have lost that much money on my current holdings if I sell at current prices…

I would keep some exposure to EM (Utilico EM - UEM, Blackrock - Frontiers BRFI) and Asia Pac (Pacific Assets - PAC).

My thinking is partly based on ditching Latin America 2-3 years ago, turned out to be a good call. I would like to stay with commodities but suspect the current very high yields will be slashed and it might take a long time to recover.

I would probably switch to UK Smaller Companies and Mid Cap and possible Europe or general healthcare (Worldwide Healthcare - WWH).

Any views ?


#2

You have such a high risk portfolio I’m sure that I like others have questions for you.

Are you saving for a particular reason? What age bracket do you fall in to, do you have a high attitude to risk?

Is this all of your investment portfolio or do you have more?

One thought is as these sectors are already so downtrodden there’s no point in selling now.


#3

it’s a very high risk portfolio @scjim but maybe that’s what you want and nothing wrong with that.

Unless you need the cash I would sit tight because they’ve already gone down so far but the questions @stromer asked you are pertinent to any firm response anyone can proffer.


#4

@scjim, I think that there is likely to be short-term pain for these areas. A combination of China’s transition to more of a service-based economy from largely being manufacturing, and the lead-up to the first rise in US interest rates.

In the absence of any other markets taking up the manufacturing slack, the China transition should continue to lead to lower demand for both commodities and for component goods manufactured in other FE/EMs. So a negative impact for all areas - although it could lead to an opportunity for EM manufacturers of finished products if a service economy leads to incresed wealth for Chinese consumers.

Whilst EM governments are less dependent upon US Dollar-denominated debt than in the past and so should not suffer to the same degree as in the past when US rates start to rise, e.g… the late 1990s, EM corporations are more indebted now than they were then, and some of this debt is denominated in USD. So there is the potential for these companies to take a further hit once interest rates do rise. If the argument is that the rises are being delayed further into the future, then what does this say about the state of global economy - and not just the USA - and what does it say for the prospects for these companies? Plus others in other regions, for that matter.

However, markets tend to be forward looking, so some, if not most of this should already be priced in - hence the falls over recent times. There is always the possibility of a bounce in prices once the ‘bad news’ about the first rise is out of the way - purely a speculative bit of wandering on my part on a Sunday morning rather than a dead-certainty prediction!

So what to suggest about your holdings. Difficult to say without knowing how they fit in with your overall portfolio. For instance, if you were to say that in total, these trusts constituted 10% of your portfolio, then I’d suggest keeping this level of allocation but to consolidate into a fewer number of holdings. I would definitely get rid of JRS for the simple fact that it is as much a gamble on the Russian political establishment as on the Russian economy. Whilst it might offer a contrarian entry point into lower-valued companies, the uncertainty over politics has to make it a highly speculative proposition, and could remain so for a good number of years to come. ANW? What does this add to your portfolio that any of the other trusts with exposure to Asia and EMs do not? Certainly, either TEM or JMG, but not both, unless these are consolidated into the three other ITs which you intend to retain.

If these ITs did constitute 100% of the portfolio, then yes - diversify into the other areas under consideration. Although both UK small and mid caps have had strong runs over recent years, so the question then is whether continued growth in these areas can continue.

For my part, I have holdings in BRCI, CYN and AAIF. The first two are relatively recent additions and are just a speculative punt on the sector, with BRCI being the latest. I’m down around 25% on CYN and 12% with BRCI, both capital-only returns. Their only saving grace is that they are not as bad as New City Energy, which is down 50%! (although ‘only’ 47% including income received…). My reason for going BRCI rather than BRWM is that the former includes oil-related stocks, so has a wider diversification of company types within this particular sector. BRWM’s problems with mining royalties was not a factor in the decision. I have been considering another top-up to BRCI, but RDSB recently won out on these stakes so I am likely to hold on for a while longer.

Unlike the other two, AAIF is a core holding for me and my interest is primarily for the income. I have also been considering a top-up here, too, but this IT is in competition with HgCapital for this - which I realise sounds completely daft with how different the two are, but that’s just my current situation with regards to my objectives and currently available resourses. And no - I’m not thinking about splitting the investment between the two!

As a summary then: the decision as to whether to reduce in these areas should depend upon the percentage size of your current exposure. If you’re looking at total return (i.e. growth) then the alternatives also have their issues - unless you think EU QE is capable of boosting european stocks once events unfold elsewhere. But I would consolidate into fewer trusts.


#5

Just to be clear these only make up part of my portfolio - currently EM 4%, Commodities 2%, Asia Pac 9%.

It was more views on whether some sectors will take a long time to recover, rather than general portfolio construction.

I think I’ll probably clear out JRS as I agree with @arkwelder on the outlook there and probably lose ANW and ditch either TEM or JPG in favour of UEM.

I think I might just retain the commodities as its a small % of the portfolio now. I’m fighting the temptation to top up BRCI - getting a view on the likely future yield would be helpful as I’m sure the current 10% is unsustainable.


#6

Overall they are a smallish part of your overall portfolio but I don’t think I would sell out of Russia at these levels, even though they must be off the lowest they’ve reached in recent times.

Russia is not a place to be long term, it’s too much about politics as we’ve seen in recent weeks with Putin repositioning himself by damping the Ukraine offensive to appear more congenial in advance of an assault on the Free Syrian Army.

I would not invest in any single country that doesn’t have the rule of law, so that would rule out Thailand too, or single China funds for me too, even though there are better property ownership laws there (to an extent).


#7

What is currently happening to the companies in the commodities sector is the reason why I would never hold any of those ITs which cover the sector for the income - when there is a general downturn in the industry, where else can the IT go to invest…?

Regarding BRCI’s yield, on the face of it the increase in revenue reserve shown in the interim report compared to both the year end and last year’s interim would suggest that income received is still increasing, as backed up by the increase in earnings per share. But if you look at the figure for dividends received then this is down compared to the same period last year, and ditto for the figure at the year end when compared to the previous year. Looking further, the increase in total revenue is due to the increase in the premiums earned from writing options.

How much that premium income can increase in future? Who knows. I do know that other ITs and OEICs use this strategy to bump up their income and the usual caveat that writing (call) options can potentially limit the growth of capital if those options do get called. As a rough guide, the ratios for income earned from dividends/interest and option writing was around 2:1 for the six months in the previous financial year and was nearer 1:1 in the latest period. Add in the fact that Glencore has announced a suspension of dividends for a while and Eni having already cut, then there have to be questions over how many others will do the same. As a result, I think that I’ll stick with deciding a top-up between RDSB and AAIF/HGT for now - and accepting the RDSB might also cut if the BG deal doesn’t go through.


#8

I saw something online about Blackrock World Mining that concerned its underlying exposure to oil. I cant remember where I read it but it is surprising to many that there is much exposure at all.

I’m not sure though if I would sell out now if I held shares in any of these funds when they’ve lost so much value already.