2 010 may turn out to be the year of the commodity fund.
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 it’s 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.
Investments that were considered exotic only two or three years ago, grouped under a miscellaneous “others” holding just one to four per cent of institution’s assets, are now mainstream. In some cases they now account for as much as 10 per cent of total funds.
“Three years ago, people were thinking of about three per cent 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 five (per cent).”
The wave of money rolling into commodities shows no sign of abating.
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 and hedging are key for investors.
As well, 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 per cent; buying and rolling oil futures contracts returned plus 13.1 per cent,” 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.”