Once the darlings of the investment world, commodities have fallen from grace in the past year due to failed promises of diversification and performance. Some fund managers believe investors have been too hasty and need to be more discerning in their selections. Supply/demand imbalances, the spectre of rising inflation and emerging market growth are reasons to keep the asset class on the agenda. Institutions may need some convincing. Last year saw the $37bn Illinois Teachers’ Retirement System put its strategy on ice while the $146.8bn California State Teachers’ Retirement System (CalPERS) slashed its investment in commodity derivatives by more than half from $3.45bn to $1.56bn.
“If prices continue to fall, then people will not invest and will pull out because a lot of the inflows into commodities were speculative money and backward looking.”
Europeans schemes have been more sanguine with, ABP, the world’s third-largest state scheme and Pensioenfonds Zorg en Welzijn (PFZW), the second-largest pension fund in the Netherlands maintaining their respective 3.6% and 7% stakes despite weak returns.
Overall, the general mood is bearish with the latest set of statistics from data provider EPFR showing a record $4.23bn being pulled from commodity funds in the week ending- February 27, up from $828m the previous week. Gold and precious metals led the way, with outflows hitting an all-time high of $4.04bn while raw materials capped the biggest monthly loss since last October. Commodities hedge funds fared no better, losing at least 20% of their assets in 2012 following the sector’s worst annual performance in more than a decade, according to industry reports.
Investors are not only twitchy over China’s slowdown and increasing correlations with other asset classes but they are being lured away by the resurgence of equities. Stock markets have turned heads this year due to optimism over the US economy and expectations of continued stimuli from central banks. Early March saw the Dow Jones Industrial Average hitting 14,286.37, eclipsing its October 2007 closing high of 14,164.53 while European and Asian bourses followed with the FTSE All-World equity index reaching 236.2 – its best level since June 2008. Meanwhile, the Nikkei 225 surged 2.1%, Shanghai jumped 0.9% and Sydney rose 0.8% which marked a 4½-year high.
By contrast, the Standard & Poor’s GSCI Spot Index of 24 raw materials was down almost 7.4% from the same time last year and prices could continue to fall if a recent World Bank report is anything to go by. It predicts that Brent oil, used as a global price benchmark for oil will average $102 a barrel in 2013, down 3% from its average 2012 price. Agriculture prices are also expected to slide while metal albeit a bright spot are still expected to average 14% lower than in 2011.
“Commodities have been a clear underperformer in 2012 and so far this year,” says Koen Straetmans, senior strategist at ING Investment Management in the Netherlands. “S&P GSCI as well as Dow Jones UBS indices have been in negative territory and there is quite a gap with equity markets which were up 14.5% in euros last year. The main reason is China and the uncertainty over the strength of its economic recovery. Also, in this low interest rate environment and with an unfolding gradual global economic recovery investors prefer riskier assets like equities.”
Frances Hudson, global thematic strategist at Standard Life Investments in Edinburgh also believes “it is a chicken and egg scenario. If prices continue to fall, then people will not invest and will pull out because a lot of the inflows into commodities were speculative money and backward looking. It is important to note though that the longer term money such as pension funds do not have high allocations despite the availability of instruments.”
Ole Hansen, head of commodity strategy at Saxo Bank, thinks that the current scenario should be put into perspective. “Investors fall in and out of love with commodities, especially when core assets such as equities and bonds are performing well. They will not hold onto a third sector for diversification. They also hunt in groups and if one goes, the others follow. There is no doubt that it has currently been a challenging sector especially last year when returns were mostly in the red and there were concerns over a slowdown in China.”
The importance of China, which consumes 45% of all metals produced, according to the World Bank report, has been well documented. The country’s drive to urbanise and industrialise has spurred the so-called super cycle with price hikes enjoyed across a divergent group including oil, metal and agriculture. The prospect of a more sluggish economy last year sent some commodities into a tailspin, casting aspersion on the asset class. While views differ on the outlook, many agree with Sandra Crowl, Carmignac Gestion investment committee member, who notes: “If you have a five-year time horizon, now is the right time to invest in commodities. There are some short-term influences such as poor European growth but global growth has turned the corner and global trade is improving. We also believe that the super cycle is still intact even though there was slowdown over the past two years. It is important not to focus on the price but the underlying supply and demand fundamentals.”
Institutions are also casting their investment nets wider and looking at products beyond exchange traded funds (ETFs), passive indices and equities to gain exposure. “Investors are being much more selective in how they access the market and we are seeing a shift to active and enhanced approaches that incorporate fundamental inputs to determine exposure relative to the index,” says Ed Rzeszowski, portfolio manager at Blackrock Alternative Advisors. “We are also seeing interest in trade finance funds which finance the transportation of commodities.”
- 1
- 2
- »
Comments