PICK: Recent Developments (BATS:PICK) | Seeking Alpha

I’ve covered the iShares MSCI Global Metals & Mining Producers ETF (BATS:BATS:PICK) twice in the past. I’ve been bullish, due to the fund’s cheap valuation and above-average dividends. As it has been over a year since I last covered the fund, thought an update was in order.

PICK has significantly underperformed YTD, as have most other value and international equity funds. Medium-term performance remains reasonably good, however. Dividends have declined too, with yields declining to 4.5%, but longer-term growth remains strong. PICK’s valuation has not seen any significant changes, while most equity indexes have become more expensive. So, the fund trades with a cheaper price and valuation vis a vis the market than before.

In my opinion, PICK’s fundamentals have very slightly worsened this past year, but the same is true of most equities. I continue to rate the fund a buy, although more income-focused investors might wish to focus on higher-yielding funds and investments.

PICK – Recent Developments

Significant Underperformance YTD

Value stocks and funds significantly outperformed in 2022, as skyrocketing inflation and rate hikes caused investors to reassess the relative merits of more tangible businesses versus frothier, uncertain tech and growth offerings. Miners and energy companies and funds benefitted from higher commodity prices too, including PICK, with the fund significantly outperforming the S&P 500 during the year.

Markets reversed themselves in 2023, with most tech and growth companies and indexes significantly outperforming YTD. PICK itself underperformed, and by a lot.

Recent value underperformance is partly due to sentiment, with investors flocking to tech and growth as inflation normalizes and rates stabilize. Fundamentals mattered too, with commodity prices declining since mid-2022. These have picked up in the recent months, however.

PICK’s recent underperformance has been a negative for investors, of course. Still, the fund’s medium-term performance remains adequate, with the fund outperforming most broad-based equity indexes since 2022, the most recent (small) equity cycle. In other words, the fund outperformed when value outperformed, underperformed when value underperformed, but outperformed on the net.

In my opinion, and considering the above, PICK’s recent underperformance is not indicative of significant issues with the fund, nor is it a deal-breaker. Equity market segments, factors, etc., sometimes underperform, so short-term underperform is rarely a significant issue.

Competitive Valuation

PICK’s valuation has not significantly changed in the recent past. PE ratios have increased somewhat, almost certainly due to declining earnings. PB ratios, on the other hand, have declined, likely because of a combination of organic asset growth and lower margins (from lower commodity prices). Nevertheless, these changes are not significant, and these figures are somewhat volatile, so I don’t believe them to be all that important.

On the other hand, most broad-based equity indexes have seen their valuations increase, including the benchmark S&P 500 index.

Due to the above, there is now a wider valuation gap between PICK and that of the S&P 500 / broader equity market. Said gap is also noticeable when comparing value and growth stocks, the former of which has performed exceedingly well YTD.

JPMorgan Guide to the Markets said valuation gap is also noticeable when comparing international and U.S. equity valuations.

Point being PICK trades with a comparatively cheaper valuation than the S&P 500 now versus last year, and the same is true of value and international stocks.

Wider valuation gaps could lead to significant capital gains and market-beating returns moving forward, contingent on valuations normalizing / favorable investor sentiment. Gains are anything but certain, although PICK has tended to outperform since valuations bottomed in early 2022.

Significant Dividend Cuts

PICK’s dividends have seen significant cuts in the recent past, with these down over 48% these past twelve months.

Figures for the latest semi-annual dividend payment are even worse, with the fund’s latest payment declining by over 50% YoY.

PICK’s dividends have decreased for several reasons.

Commodity prices have declined since mid-2022, leading to lower earnings and dividends for most commodity producers, including miners. As previously mentioned, prices have recovered a bit in the past few months.

Dollar prices increased relative to most international currencies last year, leading to lower earnings and dividends for most U.S. investors in international stocks and funds, including PICK. Dollar prices have decreased these past few months, however.

Finally, a couple of PICK’s had sky-high dividends in prior years, and recent cuts are simply a return to normal. As an example, Vale (VALE), one of the fund’s largest holdings, yielded 16% – 24% during the first half of 2022. These yields were never going to last long, and they did not.

On a more positive note, PICK’s long-term dividend growth track record remains strong, with fund dividends growing at a 9.2% CAGR for the past decade. Growth is very volatile, however.

Moving forward, I think positive dividend growth is likelier than not, owing to the recent increases in commodity and international currency prices, and due to PICK’s long-term dividend growth track-record.

Conclusion

PICK has significantly underperformed YTD and seen sizable dividend cuts, but has become cheaper vis a vis the S&P 500. Although recent results are broadly negative, medium-term results remain broadly positive. In my opinion, the fund remains a buy, but more income-focused investors might wish to focus on higher-yielding funds and investments.