BlackRock World Mining: when sorry isn’t good enough

Investors in the BlackRock World Mining investment trust (LSE: BRWM) can't have much positive to say about it after a terrible performance last year. The trust's net asset value (NAV) slumped by 26.4% and its share price by 30.4%, compared to a 13% fall in the benchmark Euromoney Global Mining index over the same period.

A large part of the underperformance was due to the collapse in October of London Mining, a Sierra Leone iron-ore miner, which led to a loss equal to 6.5% of NAV.

So at least the trust's annual report didn't try to sugarcoat things too much. "On behalf of my fellow directors, I should like to offer our most sincere regret," wrote chairman Anthony Lea. The board is "working closely with BlackRock" on "robust diligence and supervisory processes designed to minimise the risk of such issues arising in future".

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These include tighter limits on royalty contracts, the type of investment responsible for the London Mining loss. Under a royalty contract, the fund provides a mining company with financing to develop a project, in return for a share of the income from the mine.

The trust's managers viewed these as an attractive way to earn steady cash flows and fund a solid dividend, but the demise of London Mining clearly showed the risks of such deals. From now on, royalty contracts with any individual firm will be limited to 3% of assets.

Total exposure to any firm including listed shares, unlisted securities and royalty contracts will also be capped at 3% (the trust had also held a convertible bond issued by London Mining, equal to another 1.3% of NAV).

Still, many investors are likely to feel these changes are much too little, much too late especially as an attempt to mollify them by cutting BlackRock's management fees hasn't gone as far as many would like.

Previously, BlackRock took a management fee of 1.3% of gross assets per year. But with effect from 1 July 2015, this will fall to 1.2% on the first £500m of assets, 1% on the next £500m and 0.85% on assets above £1bn. Based on the trust's gross assets of £734m as of end December 2014, that would amount to 1.1% per year a total drop of just 0.16%.

What's more, using gross assets instead of net assets as the basis for calculating the fee is relatively unusual only around 15% of investment trusts do this, according to Alan Brierley of brokers Canaccord Genuity, quoted on ftadviser.com.

Using gross assets works in the manager's favour where the trust borrows money to invest; in this case, the trust's borrowings amount to around 15% of gross assets. "To be candid, we don't think the performance record justifies such fees," says Brierley.