Question: What is the justification for holding BHP shares? I have had these for quite a significant time and have lost money? Why should I continue to hold these?

Answer (by Paul Rickard): This is a really good question, particularly following yesterday’s BHP operational review. This foreshadowed production decreases in FY16 in four key commodities:

1. Petroleum by 7%
2. Copper by 12%
3. Metallurgical Coal by 6%
4. Energy Coal by 2%

Iron Ore is forecast to grow by 6%, with BHP’s share of production in FY 16 rising to 247m tonnes.

Why keep BHP? I think there are three reasons to consider:

1. History shows that commodity cycles, in particular the extent and duration of the upswings or downswings, are largely unpredictable. Clearly, we are in a downswing in commodity prices at the moment – how much further this goes, and how long it lasts, is the $64 question. Keeping some exposure to BHP now offers this upside potential.
2. Of the commodity majors (and in Australia, it is really only a choice between BHP and RIO), my preference is BHP, due to a broader mix of commodities (RIO earns more than 90% of its revenue from iron ore – I think this has material over-supply issues); and
3. BHP has made a commitment to pay a sustainably increasing dividend. If commodity prices continue to fall, this commitment may be seriously challenged – so take this into account, however on paper, BHP will be yielding around 6.4% – fully franked! A possible income stock!

Question: One of your readers recently reported on her SMSF investment strategy, which includes >50% in unlisted property trusts. Our advisers have recommended we buy commercial property, but we don’t have the time or expertise to do this.

We do have some shares in the listed property sector, but these are obviously subject to the vagaries of the market, hence in principle, unlisted property seems like a good option for us.

Have you had any recent short reviews/recommendations/suggestions of the unlisted commercial property sector, and if not, can you please do one soon?

Answer (by Paul Rickard): Thanks for the question.

Most of the unlisted property trusts are building or property specific, and are close ended. That is, they raise the money for a property upfront, and then are closed to any further subscriptions.

In theory at least, unlisted property trusts are subject to the same vagaries of the market as listed property trusts – they just aren’t as transparent and there is no observable market price.

Typically, unlisted property trusts will be priced at a discount to listed property trusts (higher capitalisation rate and higher distribution yield), because there is no or very limited liquidity, and usually, you have single asset risk. Listed property trusts tend to have multiple assets.

If you are interested in unlisted property trusts, I would get on the mailing lists of some of the larger managers – and then consider opportunities as they arise. Consider managers such as Centuria, Charter Hall, Stockland etc.

I have attached a link here for an earlier review for a fund for Centuria (now closed).

Hope this helps.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.