Demand for commodities in emerging markets together with anxiety about the stability of many currencies continues to fuel rapid growth in the natural resources sector. 

The commodities and natural resources sector has recovered strongly from its 2008 mauling and offers exposure to two important themes. One is the burgeoning growth in demand for natural resources from emerging markets, which has underpinned the recovery in metal, mineral and oil prices.

The other is growing mistrust of fiat currencies, which has been encouraging central banks, individuals and institutions to shelter some of their reserves in gold and other precious metals.

Bullish investors believe these themes still have legs. They point to the limited availability of many hard commodities and to mounting takeover activity in the sector as the big mining companies compete with China to secure future supplies. However, even the bulls warn of potential short-term volatility.

The bears, on the other hand, fear commodity prices could plummet if world growth stutters and speculators lose confidence. They are also wary about raids on the sector, such as the Democratic Republic of Congo’s confiscation of a copper mine owned by First Quantum Minerals and Australia’s plan (now modified) for a supertax on resources.

There are three investment trustsin the sector and five offshore investment companies. The latter are all relatively new and small, and follow a specialist remit. Golden Prospect Precious Metals has been the best so far, with its net asset value (NAV) per share up 40 per cent since New City Investment Management took charge in August 2008. It has done well from backing silver and gold producers.

BlackRock World Mining is much the largest of the investment trusts and carries the lowest costs. It focuses mainly on the larger mining companies and has achieved a stunning 676 per cent share price total return over the past decade, despite a 61 per cent plunge in 2008.

It has outperformed the HSBC Global Mining index since Evy Hambro moved up to lead manager in April 2009. But although the NAV per share ended September up 130 per cent since December 2008, it is still nearly 110p shy of its 2008 peak.

Hambro is positive about the longer-term prospects for resources companies. ‘Emerging markets continue to exhibit strong growth and supply remains constrained in its ability to meet demand,’ he says.

‘Double-dip fears still persist, but the economic data being released is mixed rather than uniformly negative, which has given us no cause to substantially revise our outlook, particularly given the low valuations at which the sector is trading.’

BlackRock Commodities Income offers the best yield in the sector. But on a total return measure, it has lagged the HSBC Global Mining index.

Spotlight on City Natural Resources High Yield Trust

Launched in 2003, this trust has tripled investors’ money over the past five years. With total assets of £200 million, it differs from BlackRock World Mining in its preference for medium to smaller companies – which tend to be the main beneficiaries of takeovers – and in its aversion to countries with high political risks and unstable fiscal regimes.

As a result, most of its holdings are quoted in Canada, the UK and Australia, where its confidence has been undermined by the resources tax.

Another distinguishing characteristic is its near 20 per cent exposure to fixed-interest holdings, including convertibles. These reduce the volatility of the portfolio and have contributed to an 85 per cent increase in the dividend (paid quarterly) over the past five years.

The trust has been managed since launch by Richard Lockwood, who founded New City Investment Management, and has 50 years’ experience in the commodities sector. He has tried to smooth results through diversification across a wide range of soft and hard commodities, including palm oil and rare earths.

He stepped back from day-to-day management in mid September, when the trust’s 30 per cent exposure to gold helped its NAV per share surge to 287p – 20 per cent above its 2008 peak.

His long-standing commitment to uranium, which accounts for 10 per cent of the portfolio, also began to perk up, as major users, such as Russia, China and Japan, jostled for supplies. His co-manager, Will Smith, now shares his responsibilities with Merfyn Roberts.