Ian Cowie: buying gold and high yield on the cheap

It’s outperformed peers for years and currently yields over 5%, but investors can still buy this trust for much less than its net asset value.

Gold has surged to an all-time high above US $1,900 per ounce but shrewd investors can still buy exposure to bullion at a double-digit discount to net asset value (NAV). 

Fears about a resurgence of the coronavirus, dollar weakness and a potential return of inflation, as central banks struggle to avoid an economic slump, have prompted many investors to seek a safe haven, pushing the price of the yellow metal above levels last seen during the global financial crisis nine years ago.

BlackRock World Mining Trust (LSE:BRWM) has 33% of its £894 million assets invested in gold stocks and bonds, but shares in BRWM continue to trade 12% below the fund’s NAV. Better still, this investment trust managed by Olivia Markham and Evy Hambro has beaten the Association of Investment Companies (AIC) commodities and natural resources sector averages over the last one, five and 10 years.

During those periods, BRWM generated total returns of 12%, 119% and 15% respectively. By contrast, the average for six funds in this sector were minus 21%, plus 8.3% and plus 5.3%, according to independent statisticians Morningstar.

Both sets of figures reflect the collapse of the ‘commodities super-cycle’ nearly a decade ago and, more recently, the widely-varying fortunes of different natural resources. Oil and coal, among other fossil fuels, have suffered weak demand and falling valuations, while gold and other precious metals are enjoying strong demand and rising prices.

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Hambro argues those trends have further to go. He explained: “In reaction to Covid-19, central banks and governments have implemented economic support measures that must be funded by debt or tax and may make medium-term outcomes, including inflation and exchange rates, much more uncertain.

“Gold is an asset which over very long time periods has preserved its value, a very attractive quality in today's uncertain environment. About 40% of the portfolio is exposed to companies in precious metals, of which 90% is gold.

“There are also broad thematic trends that will continue to drive investment, despite the significant impact of Covid-19. De-carbonization is one of the most significant. We are also seeing a drive to cut ongoing costs and move to cheaper renewable power from the mining industry.”

Commodities companies Rio Tinto (LSE:RIO), BHP (LSE:BHP), Vale (NYSE:VALE), Newmont (NYSE:NEM) and Barrick Gold (NYSE:GOLD) are the five biggest holdings in BRWM. In addition to its 33% asset allocation to gold, another 32% is invested in ‘diversified’ commodities such as cobalt and lithium; minerals used to make batteries for electric cars. Nearly 17% of the fund is allocated to copper, giving further exposure to the electrification theme.

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Whatever happens to commodity prices, shareholders are paid to be patient by BRWM’s inflation-beating dividend yield of 5.4% paid quarterly. While that income is not guaranteed and may be cut or cancelled without notice, AIC statistics show that this trust has revenue reserves of more than £41 million or enough to maintain current dividend payments for just over a year, even if underlying earnings fall to zero.

A diversified portfolio, including a one-third allocation to bullion, remains this fund’s biggest risk-reducing characteristic. Emma Bird, an analyst at Winterflood Securities, pointed out: “The mining sector remains economically sensitive and any setbacks to the global recovery are likely to lead to further volatility.

“However, the BRWM portfolio’s weighting to gold miners has alleviated this impact and is partly behind the fund’s positive absolute performance so far this year. While it could see volatility in the short-term, we believe that it remains an enticing long-term prospect, particularly on its current discount.

“In addition, we see its dividend as a key part of its attraction, although the board does not have a progressive dividend policy. While we suspect that it would be prepared, as it has historically, to use revenue reserves to make good a limited shortfall, it could also rebase the dividend in the event of a material revenue shortfall.”

Cautious optimism about the outlook for dividends was also expressed by the analyst Iain Scouller at Stifel. He said:

“Although recognising that the current economic climate makes the income for the full year uncertain, the board of directors anticipates that it will continue to pay a 4p interim dividend for the next two quarters and BRWM will then distribute substantially the full balance of the company’s available income for the year as a final dividend.”

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The economist John Maynard Keynes once derided gold as “a barbarous relic” because it has limited utility value and yields no income. It certainly isn’t risk-free as demonstrated when the precious metal’s price plunged to $1,062 per ounce in December 2015.

But bullion can shine when dark clouds obscure the economic outlook. Here and now, a double-digit discount on a professionally-managed portfolio of commodity stocks might prove a bargain.

Ian Cowie holds shares in BHP as part of a diversified portfolio of shares.

Ian Cowie is a freelance contributor and not a direct employee of interactive investor.

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