The Merrill Lynch commodities income investment trust aims to deliver a target income yield of 4.25 per cent a year by investing in a portfolio of 30-70 commodities stocks. The trust can also invest in other investment funds, including those managed by Merrill Lynch, up to a maximum of 15 per cent.
The trust can also be geared by up to 40 per cent but in practice this will be limited to 20 per cent. Merrill Lynch will also aim to manage discounts to net asset value using regular tender offers and share buy backs.
The lead manager for the trust is Merrill Lynch director Richard Davis, a member of the five-strong natural resources team. He worked as a geologist for three years before joining Merrill Lynch in 1994. When selecting stocks the team draws on a wide range of research facilities including an in-house global database. This enables them to examine the cash flow of companies in detail, so they can select those that offer the best opportunity for good returns. The trust will not be managed according to a benchmark index – instead it be free to invest in any region which has the best investment opportunities. Company visits will also be made before any stock is included in the portfolio.
The outlook for commodity prices is good, according to Merrill Lynch, with strong cash yields from mining and energy stocks, which have the potential to increase.
Demand for commodities is exceeding supply with continuing economic growth and strong demand from China and India, which will sustain prices. However, commodities stocks can be volatile and an element of political risk may be introduced where the trust invests in precious metal companies based in emerging markets where the government has a lot of influence on the private sector.
These potential risks may be amplified by the use of gearing which creates the potential for greater returns providing all goes well but also increases interest rate risk and the risk to capital.