Retail investors have continued to crowd into the broad commodity-fund sector even after prices for corn, wheat and soybeans reached 2-1/2-year highs this year, an analysis of fund flows showed.
The growth of “alternative” investments is partly the result of lessons learned after the financial collapse of 2008-09, which includes the importance of diversification as well as a desire to hedge potential inflation, analysts said. Commodities generally perform well in times of price inflation, especially when compared with investments like fixed-income securities.
“Agricultural commodities have room to run,” said Morningstar analyst Abraham Bailin, who specializes in exchange-trading funds. Drivers of the run-up include “loose” U.S. monetary policy and U.S. dollar weakness, as well as demand from a growing world population, especially in developing nations, he said.
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The flow of money into ag sector mutual funds totalled $21.77 billion last year.
The commodities funds segment, which invests primarily in equity securities of companies involved in the production or trading of physical commodities or derivatives, took in an estimated $14.98 billion in 2010.
The data shows that within that commodity-fund total, agricultural funds – non-equity investments in agricultural commodity derivative instruments or physicals – drew an estimated $2.65 billion last year.
Agricultural funds’ one-month average return was a modest 1.89 per cent, while the three-month average was more robust at 22.39 per cent and the average one-year return was a whopping 47.50 per cent, surpassing that of the metals category, which logged a 32.37 per cent one-year average.
