Picking stocks can be a tough game to get right. Even the professionals struggle.
Indeed, the vast majority of active fund managers, who pick stocks for a living, fail to outperform the market on a regular basis.
And for the individual investor, with limited capital and limited time, stock picking is extremely difficult.
Sector struggles
Trying to pick the best companies in any particular industry is a complex process. But attempting to pick individual companies in the mining sector is a full-time job.
For example, the sector’s largest players, Rio Tinto (LSE: RIO) and BHP Billiton (LSE: BLT) are overexposed to iron ore and coal, two commodities that are plagued by oversupply and falling demand.
After its recent spin-off of non-core assets into a new company named South32, around 56% of BHP’s earnings will come from the production and sale of iron ore and coal — based on 2014’s numbers. Almost all of Rio’s earnings come from the production and sale of iron ore.
Iron ore play
In some respects, if you pick BHP or Rio for your portfolio, you’re betting on the price of iron ore.
Due to seasonal restocking at Chinese steel mills the price of iron ore has recently rebounded to $63 per tonne, off a five-year low of $47 per tonne hit during April.
However, analysts forecast that the price of iron ore will remain below $65 per tonne for the next two years as the market grapples with oversupply. A price of $65 per tonne is approximately 50% below the all-time high iron ore price reported several years ago.
Diversified pick
BlackRock World Mining Trust (LSE: BRWM) offers a more diversified play on the mining sector.
The trust’s largest positions are BHP and Rio, but the rest of the holdings are extremely diversified across all sub-sectors of the mining sector.
Holdings are both UK and international companies. The investment trust’s top ten holdings make up 60.4% of assets under management.
Poor performer
Unfortunately, World Mining has underperformed BHP and Rio by 8% and 38% respectively, excluding dividends, over the past 24 months.
But this underperformance can be traced to one key mistake: London Mining.
At one point, World Mining had approximately 6% of its assets invested in London Mining. These included a royalty contract and one of the mining minnow’s convertible bonds.
When London Mining went out of business last year, the value of these assets was written down to zero, costing the trust £50m.
To make up for this mistake, World Mining’s managers apologised to investors and then started to shake things up. A new co-manager was taken on, fees were cut, and stricter investment guidelines were put in place.
Management fees have dropped to around 1.1% and the trust trades at a discount of 12% to its net asset value.
Top income pick
Not only is World Mining a more diversified play on the mining sector but it’s also a top pick for income investors.
Specifically, the trust currently supports a dividend yield of 6.8%, and managers have confirmed that, for the time being, this payout is here to stay. Rio and BHP currently yield 4.9% and 5.8% respectively.
