Commodity investment trusts for an inflationary future

There is a growing consensus that the unprecedented level of monetary and fiscal stimulus will result in higher inflation and if that is the case it is the mining and energy stocks that could offer some of the best protection.

Analysis by Schroders has found that certain commodities and equities, particularly those that are energy and metals related, provide good inflation hedging characteristics and have historically provided strong returns above inflation.

We have already seen a strong recovery in some of these markets since the sell-off last March with copper, nickel and tin all hitting multi-year highs in anticipation of increased infrastructure investment and the move to a greener economy. WTI oil is also back close to $60 per barrel.

The easiest way to get a managed exposure to this area is by using one or more of the handful of commodity-related investment trusts. These tend to be quite different in nature to each other, so it is important to be clear about what you are buying.

Growth and income

The largest and best known is BlackRock World Mining (LON: BRWM) with total assets of just over a billion pounds. It is one of Winterflood’s recommendations for the year and offers a diversified exposure to the mining sector with access to a number of themes including sustainable materials, electric vehicles and gold.

A key part of its attraction is the sustainable 3.7% yield that is generated from a variety of income sources including dividends, fixed income, royalties and option premia. There have been times in the past when the shares have traded at a double digit discount, but they have recently moved to a small premium.

CQS Natural Resources Growth & Income (LON: CYN) is much smaller with assets of just over £100m, yet the shares are still available on a ten percent discount. The trust offers a diversified exposure to the mining sector and an attractive yield of 3.6%, although it has lagged well behind the long-term performance of BRWM.

A more focused exposure

Many people tend to think that the best guard against inflation is gold, yet the relationship is not as clear as you might expect. The best correlation is with real (inflation-adjusted) interest rates, as when these fall, gold tends to rise, as it did during the 1970s.

If inflation picks up as looks likely and nominal interest rates stay low as the central banks have pledged it should be the perfect scenario for gold. One of the best ways to benefit from this would be Golden Prospect Precious Metals (LON: GPM), the £47m precious metals mining trust that my colleague Simon Cawkwell has been advocating for some time.

There are also a couple of interesting plays on the ‘build back greener’ theme. The BlackRock Energy and Resources Income Trust (LON: BERI) that is yielding 4.3% has a quarter of the portfolio in energy transition, a similar amount in traditional energy companies and the rest in mining stocks, while the main focus of Geiger Counter (LON: GCL) is the uranium industry, which should do well if nuclear energy becomes a bigger part of the solution.