Investors in mining stocks are a spooked lot. With prices significantly off the highs of 2011, metal stocks have lost their sheen and performance numbers are under a cloud. China's economic slowdown, the US recovery losing steam and the never-ending, but ever deepening, European crisis has caused collateral damage to numerous countries.
While this undoubtedly gives the prophets of doom sufficient fodder for rhetoric, it may help to take a different perspective. If you possess the stomach for a rocky ride and the fortitude to break away from the herd, you could look at tanking up on these stocks. And the smartest way to do so is by considering the DSP BlackRock World Mining Fund.
This fund offers an exposure to mining stocks across the globe (such stocks are scarce in our backyard). The mandate does not permit it to invest in the metal directly, but in companies that mine it. So while the underlying metal has a role to play in the stock prices; it is not the sole determining factor.
In fact, these stocks manage to deliver higher returns than the metal they mine. That is because they embody a neat trait called leverage which means that for a rise in the price of the metal, they tend to rise higher. Let's say that the leverage is 3 to 1. What this means is that for every 1% rise in gold, there is a 3% rise in the stock. It's for this reason investors prefer opting for mining stocks which are a more volatile play on the price of the metal. Simultaneously, on the way down, they fall harder.
Though beaten down mercilessly, eventually, these stocks will rebound. The supply of precious metals is relatively inelastic. Demand, over the long-term, will not slow down and the diminishing number of new reserves will fail to compensate for dying mines. Reserves are, by and large, being depleted faster than they can be discovered and once discovered it takes a few years for a mine company to start producing that metal.
Right now, the stock markets globally are not courting precious metal stocks and it would be unsubstantiated to assume that a turnaround is round the corner. In fact, the correction could still deepen. The fund performance commentary does admit that the global macro-economic outlook and fragile investor sentiment will hinder performance. But it also admits that valuations look attractive across a variety of metrics such as earnings and cash flow multiples. The time is right to start paying attention to such stocks. Even if you are reluctant to part with your cash, at least wait and watch.
Make a wise choice
Gold purists may turn their nose at this suggestion, but DSPBR Mining Fund does offer a slightly more moderated stance than a pure gold play when compared to AIG Gold Fund and DSP BlackRock World Gold Fund. In the case of the latter two, the exposure to stocks is also global but the fortunes are linked to just one notoriously volatile commodity - gold. This fund, besides a dominant exposure to gold stocks, buys other metal stocks like iron ore, copper, platinum, palladium and zinc, to name a few.
Stock selection is all the more tricky where such a universe is concerned. Mining companies have to contend with numerous hindrances, such as labour issues, strikes and government interference, that could impact their smooth functioning. Also, buying the metal is a completely different ball game from purchasing a company that mines it. Here company financials, business cycle, management team, margin profile, credit issues, amount of leverage, nature of its hedging policy and numerous other issues beg for analysis.
In this light, it pays to go with a renowned money manager with competent expertise where such a product is concerned. This fund invests predominantly in the units of BlackRock Global Funds - World Mining Fund. BlackRock is a global money manager managing a total of $3.56 trillion across asset classes.*
Data as on June 30, 2012 and sourced from BlackRock's website
Ensure that only a small allocation of your portfolio finds its way into this fund; keep it to a maximum 10% of your overall equity exposure
Invest systematically, after all prices of these stocks could drop even more
Keep a long-term horizon of at least 5 years in mind
If you cannot stomach volatility or ignore short-term losses, keep your distance
Be prepared to stay cool under pressure; this ride is only for the adventurous who know that risk and turbulence come with the territory.
Author: Larissa Fernand, Fundsupermart.com.
This article is for information purpose only. This article and information do not constitute a distribution, an endorsement, an investment advice, an offer to buy or sell or the solicitation of an offer to buy or sell any securities/schemes or any other financial products /investment products mentioned in this article or an attempt to influence the opinion or behavior of the investors /recipients. Any use of the information /any investment and investment related decisions of the investors/recipients are at their sole discretion and risk. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Opinions expressed herein are subject to change without notice.