After having their fingers scorched in the financial crisis, many money managers are turning to commodity funds, a trend which could see their value rise by as much as a third
Author: Christopher Johnson and David Sheppard (Reuters)
Posted: Tuesday , 19 Jan 2010
LONDON (Reuters) -
Burnt by the financial crisis of the last two years, money managers are now raising sharply the amount of money allocated to raw materials such as oil, gold, copper, sugar and coffee.
The value of commodity funds looks set to grow by a third this year, or by as much as $100 billion, as money managers seek better returns, hedges against inflation and diversification away from traditional investments in stock markets or bonds.
And commodities are being managed much more actively, with frequent rebalancing, futures trading and short selling competing with traditional passive long-only funds.
“Commodities are an asset class which is still, from a global investor standpoint, in its infancy compared to bonds and stocks,” said Stamford, Connecticut-based Kurt J. Nelson, who helped launch SummerHaven Investment Management last year.
“It’s natural that for the first five to 10 years, investor interest is based on the most simple, easy-to-understand benchmarks, and now its natural for them to move towards a more active style of investment and asset management.”
Barclays Capital figures show commodity investments in passive, long-only commodities funds increased by $93 billion last year to $255 billion with $67 billion in fresh inflows hitting the market. Fund managers estimate that inflows this year will match or even exceed 2009.
“STARTING AT 5″
Investments that were considered exotic only two or three years ago, grouped under a miscellaneous “others” holding just 1-4 percent of institution’s assets, are now mainstream. In some cases they now account for as much as 10 percent of total funds.
“Three years ago, people were thinking of about 3 percent allocations for commodities,” said Douglas Hepworth, director of research at Gresham Investment Management, which saw its assets in commodities more than double to $7.5 billion last year.
“Now, what I am seeing is people starting at 5 (percent).”
Kevin Baum, a fund manager at Oppenheimer’s Commodities Strategy Total Return Fund, sees the trend accelerating.
“I wouldn’t be surprised longer term to see those allocations move even higher still,” Baum said. “For the moment, 5-10 percent is definitely becoming more common.”
The wave of money rolling into commodities shows no sign of abating: “Very strong momentum is intact,” Hepworth said.
Fund managers like commodities because they tend to move in a different cycle to stocks and bonds. Because many commodities such as oil are priced in dollars, they become cheaper for many end-users when the U.S. currency falls.
Hilary Till, principal at Chicago-based proprietary trading firm Premia Capital, says this has led to huge demand for some commodities as hedges against potential dollar depreciation.
DIVERSIFICATION
“Potential demand for this short of hedge could be greater than the size of the commodity futures markets,” Till said.
Diversification and hedging are key for investors.
“The negative correlation or very low correlation with the other asset classes has always been an attraction. But what I’m hearing now is increasing concerns about inflation,” Baum said.
“This is something they want to hedge against. Commodities, as a result, are receiving a lot more time and attention.”
Commodities can offer attractive returns, Till said:
“It is interesting to compare the investment returns in 2009 for various oil proxies. Exxon Mobil declined about 13 percent; buying and rolling oil futures contracts returned plus 13.1 percent,” Till said.
SummerHaven Dynamic Commodity Index, rebalances each month, picking 14 commodity futures from a basket of 27, Nelson said:
“We rebalance on a monthly or more frequent basis because the underlying fundamental information varies on a more frequent basis than annually. While crude might be a great commodity to own today, it won’t necessarily be four months from now.”
“We’re happy to take both long and short positions.”
Matthew Bradbard, founder of commodity brokerage MB Wealth Corp, tips a range of commodities to do well this year.
“My picks for 2010 include sugar, silver, agriculture (corn more than any other), coffee… and live cattle.” (Additional reporting by David Brough and Barani Krishnan in New York; Editing by Hans Peters)