How to harvest gains from agriculture, energy and gold

by Emma Wall

Commodity shares are likely to have caught the attention of contrarian investors. Despite positive developments – including gas discoveries in the US, renewed consumption in China and a gold price bounce – many resources-related stocks and funds fared poorly last year.

We explain how to get exposure to gold, mining and energy.

Energy

Pau Morilla-Giner, commodities specialist at asset manager London & Capital, said the main beneficiaries of the shale gas discoveries in the US would be the water and waste industries.

"Companies involved either through water supply, sale of water chemicals, fracking pumps or associated wellhead infrastructure should see much more business," he said. "Companies involved in regulation or testing should also see benefits as regulation increases and standards tighten. Companies involved with safe disposal of hazardous waste are already seeing some activity through treatment and disposal of the highly contaminated byproducts from shale production. This demand looks sets to increase as regulation on the disposal of fracking fluids becomes much stricter."

He tipped Ecosphere Technologies, a water recycling company; Intertek, an international group of testing laboratories; and Altela, a water treatment desalination company.

Gold

Wealth manager Brian Dennehy of FundExpert.co.uk this week urged investors to sell gold bullion and buy gold mining shares. "Gold is neither a safe haven nor an inflation hedge," he said. "But central bank largesse could trigger a significant bounce in gold mining shares.

"Before Christmas, when the US Federal Reserve announced continuing massive money printing, gold should have soared – but it didn't. But that same central bank largesse could trigger a significant bounce in the shares of gold mining companies in 2013. The large deflationary waves, from demographics and huge debt piles that governments refuse to tackle, could keep a lid on the gold bullion price for some time."

He tipped the BlackRock Gold & General and Smith & Williamson Global Gold & Resources funds.

The price of physical gold bounced this week on news that Germany's central bank was repatriating bullion reserves from New York and Paris. Experts are divided on whether the gold rally has run its course, with BlackRock's Evy Hambro saying that it will peak this summer at $2,400 an ounce. The price closed in London at $1,675 on Thursday.

Exchange-traded funds are increasingly the most popular method of gold investment. They are available for gold, silver, platinum and palladium. ETFs can be traded throughout the day – all you pay is the dealing charge of around £7 per trade.

Mining

Mining stocks are historically very volatile. Following the news earlier this month that the US had avoided the "fiscal cliff" of tax rises and spending cuts, mining stocks registered the greatest rise in the FTSE 100 – but then the greatest fall when the index corrected itself.

It is such fluctuation that causes Hargreaves Lansdown's Mark Dampier to advocate buying a fund with exposure to the sector. "In a 'risk-on' environment, the top performers are commodities, but equally when there is bad news they are often the first to fall," he said. "Many UK managers have a hefty chunk of their funds in the mining sector. Nigel Thomas's Axa Framlington UK Select Opportunities fund and Tom Dobell's M & G Recovery are both good ways to play the story."

For speculative investors, Mr Dampier said Russia was an option. Energy makes up about 60pc of the Russian stock market. "Russia is very cheap and making lots of money from oil – at some stage this has to filter through to investment funds," he said. He tipped JP Morgan Russian investment trust or the Neptune Russia unit trust.

Soft commodities

Soft commodities such as cocoa, agricultural products and timber can provide a useful diversifier in a portfolio. The returns have been pretty good too – the Sarasin AgriSar fund has risen by 12pc over the past year, for example.

Investors need to do their homework when investing in agriculture, as one fund can differ greatly from the next. Sarasin's AgriSar fund invests in the entire supply chain, from grain to supermarkets. This means that, although you may miss out on large upsurges, there will be much smoother growth. Eclectica Agriculture invests only in the "inputs", such as corn, grain and fertiliser, and this makes for a volatile fund. It has returned 4.3pc over the past year.

Investing in soft commodities can have tax benefits too – as long as the timber you own is regularly felled and operated as a working piece of woodland it is exempt from inheritance tax and capital gains tax.

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