There is a conundrum surrounding investing in commodities, according to Australian equity managers, as they grapple with the dividends they provide and the long-term sector sustainability.
Resources had been the first sector to recover from the pandemic, it was already back at pre-COVID earning levels, and was the biggest dividend-payer in the ASX 200 thanks to firms such as BHP, Rio Tinto and Fortescue Metals.
“Dividends for resources have eclipsed their pre-COVID 19 levels, the payout ratio is already at a historically high level and less likely to increase further. Further resource dividend resilience, therefore depends on the prevailing high commodity prices and earnings being sustained,” Tyndall Asset Management said in a report.
Speaking to Money Management, Tyndall portfolio manager Malcolm Whitten, said: “There is a conundrum around investing in iron ore, for their ability to generate cash then it is fantastic but the sustainability of that is in question. Valuations seem excessive but on the other hand, you can get juicy dividends.
“We have been reducing our exposure which is contrarian but we think there are problems surrounding the supply of iron ore.”
The Nikko AM Australian Share Income fund, which was acquired by Yarra Capital Management in April 2021 and would be rebranded as Tyndall AM, had reduced exposure by taking profit from Deterra Royalties and reducing BHP to reduce downside risk to iron ore.
Shares in Deterra Royalties, which demerged from Iluka Resources in September 2020, had fallen 3% over one year to 5 May but BHP had risen by 39%.
But Jun Bei Liu from Tribeca said it was key for investment managers to work with resources companies on their environmental, social, and governance issues as it would be “not fair” to let investors missing out on the dividends they generated.
“We want companies that will be around for the next five to 10 years and resources are exposed to ESG problems. It is a sector where you need to work with companies as trying to improve and influence is better than just shunning them.
“It is not fair to let go of the dividend that they would be paying out.”
Her Tribeca Alpha Plus had 20.5% allocated to materials and 3.4% allocated to energy as at the end of February, 2021.
However, she said one alternative area where she was keen to explore within resources was the technology which was being used to make resources more efficient and environmentally-friendly. There were not any in Australia currently but there were opportunities in Japan, for example, for investors who were looking globally.
