This article is part of Morningstar’s Guide to Investment Trusts, highlighting the benefits of these unique investment vehicles – busting the investment trust jargon, revealing potential pitfalls and celebrating those experienced managers who have earned the top ranking from Morningstar fund analysts.
Oil prices continue their downward spiral – priced at $110 a barrel last summer, Brent crude now sits around $56 a barrel.
The fall has resulted in record low levels of inflation in the UK to just 0.5%, with the Bank of England today predicting that inflation could turn negative within a few months.
Governor Mark Carney was adamant that the fall was temporary however, saying that the UK was not experiencing deflation.
“The most important single reason for below-target inflation over the past year is the unexpected recent sharp drop in energy prices,” he stated in his letter to Chancellor George Osborne.
"On the assumption that energy and food prices stabilise, CPI inflation should pick up notably once earlier declines start to drop out of the annual comparison, towards the end of this year, " he writes.
But Chris Beauchamp, market analyst at IG predicts there is further to go.
“Those expecting a continued bounce in crude will have been dismayed to see the latest dive lower. With Brent having failed to cling on to the $58 level, a retest of the January lows has become the most likely eventuality,” he said.
“A deterioration in risk appetite caused by the Greek woes leaves oil looking overextended after the strong run we have seen in the past two weeks. Dollar buying has driven down gold once again, with the $1230 level lost once again.”
He is not the only one, Tom Kloza, chief oil analyst at Oil Price Information Service, told broadcasters at CNBC that the "cycle has a long way to run out".
Long term demographic trends support a rising oil price, simply put, it is a finite asset with a growing demand. Timing, as with all investments, is everything – but if you are confident in Carney’s predictions and looking for a diversifying asset for your portfolio these three investment trusts offer exposure to the sector and are highly regarded my Morningstar fund analysts.
BlackRock Commodities Income Investment Trust (BRCI)
This Bronze Rated trust is run by highly regarded manager Olivia Markham. Although she has been in charge here only since January 2014, she is no stranger to the sector. She has been a member of the BlackRock Natural Resources team since 2011, having started her career at BHP Billiton; thus, she brings both industrial and financial experience.
The starting point is asset allocation and the split between mining and energy, with an eye on the fund’s income requirement. The fund also has the potential to include up to 10% in agriculture; while those names typically don’t pay a dividend, Markham is prepared to hold the highest-conviction ideas if their valuations are compelling relative to the other sectors.
BlackRock World Mining Trust (BRMW)
Events last October knocked analysts’ rating of the World Mining Trust from a Gold to a Silver following the collapse of one of the trust’s holdings.
But conviction in the management team at BlackRock World Mining is still high and their process has been applied consistently over the years. The fact they have visited every mine in which they invest, including regular trips to Sierra Leone, inspires confidence in the depth of their due diligence process.
Their deep knowledge and experience in this sector puts them head and shoulders above most peers.
