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The fruits of commodity investing

Gold foreign funds spring a surprise, but other commodity plays don't


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The fruits of commodity investing

With the 22 per cent price rise in gold for the one-year period ended July 25, international gold funds have seen huge jump in net asset value. These funds invest in the stocks of gold miners. Two factors have boosted returns of gold mining funds in the last one year. First, after a four year bear market which forced them to cut costs and sell assets, gold miners have reported large jumps in margins and cash flows during the recent rebound in gold prices. Second, the bear market in these stocks had beaten down valuations to a level where they were ripe for bargain hunting.

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DSP BlackRock World Gold Fund, which invests predominantly in units of the $5.7-billion BlackRock Global Funds - World Gold Fund, has seen its returns top 100 per cent in 12 months. This is in line with the stock price returns of major stock holdings like Newcrest Mining, Randgold, Newmont Mining, Agnico Eagle Mines and Barrick Gold Corporation. Similarly, Kotak World Gold Fund feeds into units of Falcon Gold Equity Fund. It has gained 95.20 per cent in the one-year period. Globally listed gold mining stocks have doubled or even given 200 per cent returns in rare cases in the year to date period.

However, these Indian schemes, benchmarked against FTSE Gold Mines Index, are yet to prove their mettle over the long-term. Even after mind-numbing one-year gains, they are deep in the red for a 5-year investment period, at a time when large-cap equity funds have gained over 10%. For the 7-year horizon, DSP BlackRock World Gold and Kotak World Gold Fund have returned 2-3 per cent, under-performing even domestic price of gold (10.7 per cent gain).

Another fund, DSP BlackRock World Mining Fund, which feeds into BlackRock Global Funds (BGF) - World Mining Fund, has benefitted from the short-term spike in gold mining companies too. This fund has a broader mandate to invest in stocks of companies which produce base metals and industrial minerals such as iron ore and coal. But the BGF World Mining Fund counts many gold miners in its top holdings. If you set aside exposure to BHP Billiton, Rio Tinto and Glencore, a significant part of it is also invested in Randgold, Barrick Gold, Newmont Mining, Newcrest Mining and Franco Nevada. The DSP BlackRock World Mining Fund has gained 57% in just 6 months. However, it is in the red for 3 and 5 year periods.

What about agriculture?
While global funds investing in gold miners have fared well, international commodity themes such as agriculture haven't matched them. Between 2008 and 2011, the agriculture/commodities theme saw many foreign funds like Birla Sun Life Commodity Equities Fund - Global Agri Plan (invests in companies having business exposure to agricultural commodities) and three Fund of Funds (FoFs) - Birla Sun Life Global Commodities Fund, DHFL Pramerica Global Agribusiness Offshore Fund and DSP BlackRock World Agriculture Fund being launched.

These funds essentially invest in the stocks of companies like Monsanto, Bunge, Wilmar, Deere&Co., Syngenta AG, Tyson Foods and Potash Corp of Saskatchewan which are directly and indirectly users or producers of agricultural commodities. While their 6-month returns of 11-29 per cent look impressive, three out of these four funds have lost money in the one year ended July 25 with only Birla Sun Life Global Commodities Fund delivering positive returns (3.2%) in this period. Over a three-year period, barring Birla Sun Life Commodity Equities Fund - Global Agri Plan that has returned 6.05 per cent, the rest have lost money.

Over a 7-year time horizon, Birla Sun Life Commodity Equities Fund - Global Agri Plan has made 6.2 per cent return (lower than Sensex's 8.98 per cent) while Birla Sun Life Global Commodities Fund has delivered just 1.63 per cent. After 2009, commodities and stocks of companies linked to them have seen big declines amid slowing global economic growth and macro headwinds.

 
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