DSP BlackRock has launched the World Mining Fund, an open-ended fund of funds that will invest in BlackRock Global Funds' World Mining Fund. For Indian investors this new fund offers an opportunity to invest in the world's premier mining companies. As Kolkata-based mutual fund analyst Prasun Mukherjee says: "The biggest companies in the mining sector are not Indian. If you want exposure to this sector, the best option is to go for global companies."
Investment rationale
According to the fund house, the rationale for investing here is as follows:
Demand drivers. The world economy is recovering after the debacle of 2008. Soon while the developed economies are expected to show expansion, countries like China and India are expected to revert to their trend level of growth since 2000. Initially growth will be supported by the fiscal stimulus that countries have launched. "Close to 75 per cent of the stimulus was to be spent on areas like infrastructure creation that would consume commodities," says Pankaj Sharma-executive vice president, DSP BlackRock Mutual Fund. By next year private consumption is expected to revive. As world economic growth gathers pace, industrialisation and infrastructure creation will drive the demand
for commodities.
A more durable source of commodity demand comes from urbanisation. In China and India half a billion people are expected to join the urban population in the next 15-20 years. "When GDP per capita on purchasing power parity basis crosses the inflection point of $3,000, there is a spurt in commodity consumption," says Sharma.
Supply scenario. In 2008, anticipating a slowdown in demand, the world's largest mining companies cumulatively cut down capital expenditure by $50 billion. Now, as demand revives, supply constraints are likely to emerge and prices likely to escalate. Thus this is possibly a good time to invest in the fund.
Proven track record
BlackRock's World Mining Fund has been in existence for 12 years and has garnered a good track record (see box: Mother fund's stellar track record).
The fund has been rated triple-A by Standard and Poors and has received an 'elite' rating from Morningstar. The same core team has managed the fund since inception. Between January and October this calendar year $2 billion of new money has entered the fund, raising its corpus to $13 billion.
Expense ratio. The mother fund has an expense ratio of 1.85-1.90 per cent and the Indian fund will charge another 75 basis points. The total expense ratio for Indian investors is likely to be in the range of 2.60-2.65 per cent. "For equity funds the recurring expense is around 2 per cent. In comparison, the 2.60 per cent expense ratio may seem high. But expense ratio should be a consideration while investing in an index fund where there is not much scope for differentiation and outperformance. A mining fund does have that scope. If you like the theme, then the expense ratio should not dissuade you from investing in the fund," says Mukherjee.
Risky investment vehicle
A global commodity fund such as this carries a number of risks:
Geopolitical risk. A lot of the world's mining resources are situated in politically unstable regions. The danger of conflicts disrupting the activities of mining companies is always present.
Economic risk. Like war, an economic upheaval could also affect a global mining fund. Imagine that a country gets engulfed in an economic crisis and trading on its stock exchanges stops. If the fund has invested in the stocks of that country, it would be adversely affected.
Currency fluctuation. When the rupee is depreciating, returns earned in a foreign currency get a boost. Conversely, when the rupee appreciates, returns earned abroad are adversely hit.
Timing the commodity cycle. Yet another risk arises from the fact that commodities experience boom-and-bust cycles. These are very long, lasting 10-15 years. "The current commodity boom began in 2000. We are in 2009 now. A large chunk of the cycle is over, unless this one lasts longer than usual. At this late stage, investors may not make as much money as they would have if they had invested in the early part of the cycle," says Pune-based financial planner Veer Sardesai.
Further, investors should also be well informed to be able to time their exit. "If you have invested in a quality diversified equity fund, you can hold it for long. You don't need a well worked out exit strategy. But in the case of a commodity fund, the moment a lot of supply comes onstream, prices crash, and so do the stock prices of mining companies. The investor must understand industry dynamics and know when to exit," says Sardesai.
Who should invest?
The investor must be a high net worth individual — someone who has the financial resilience to stomach the volatility inherent in commodity funds.
Further, the investor should not be risk-averse. The expected returns are high, but so is the level of volatility compared to that experienced in a diversified equity fund. "When a commodity boom gets over, commodity prices crash sharply, and so do the stock prices of mining companies. They could fall as much as 50 per cent. Hence, this is not a fund for the average conservative investor who follows a buy-and-hold strategy to fund his retirement. It is for someone who wants to take additional risk for the additional returns," says Sardesai.
How much?
Let us say that you use the thumb rule of 100 less age to determine the proportion of your investments that should go into equities. Then 10 per cent of the equity portion can be allocated to a mining fund such as this. If you are 40 years old, 60 per cent of your investments would go into equities. A 10 per cent allocation out of the equity portion would be 6 per cent of your overall investment.
Finally, as Mukherjee says: "The demand for basic commodities depends on how prosperous the world is, and how far it is using that prosperity to create capital assets. If global economic growth falters, an agri fund might still do well, but not a mining fund. In the present context, however, I feel a mining fund is likely
to do well."
This ride, though turbulent, could earn you money, provided you have the knowledge and the means to negotiate the hairpin curves.
Article source: http://in.news.yahoo.com/48/20091130/1238/tbs-ride-the-commodity-boom.html
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