Commodity Falls Spark Investor Rethink

It feels like the 2008 rollercoaster all again for commodities investors.

Prices of commodities oil to copper have fallen sharply. Money is flowing of the sector and some investors are questioning the -called commodities ‘supercycle’ – the mantra prices will rise and rise, underpinned Chinese growth.

In a , commodities “is no longer the sexy asset class it to be”, says Jonathan Whitehead, global head of commodities Société Générale.

Investors have voted their feet: the eurozone crisis and worries global economic growth triggered an $8.2 billion outflow the sector in May, the second-biggest monthly , according to estimates by Barclays.

But the sell-, even if nearly a record high, represents 2 percent of total commodities investments.

For all the parallels 2008, commodity specialists note that the panic seen to get out of commodities is not evident time.

Compared with four years , when the asset class was still new many institutional investors, “there are a lot more sophisticated investors”, says Kevin Norrish, strategist Barclays.

“What is different 2008 is that there plenty of investors who are considering allocating or increasing their allocation commodities,” he says.

But the downturn prompting some changes: investors are looking new ways to tap the asset class that will perform if prices remain volatile.

They are putting money a new generation of indices and hedge that yield strong returns even a bearish market.

Simon Fox, a principal consultant investment advisers Mercer in London says “passive” investments investors put their money in funds simply track indices are not an efficient of getting exposure commodities.

In , some managers are making investments in farmland and natural resources companies, a trend is likely to accelerate.

ABP and PGGM, the leading Dutch pension funds pioneered commodities investment in the early 2000s, are of that trend. Both, with billions of dollars under management, continue to see commodities an important part of their portfolios. But they are now a far more active approach.

Olav Houben, head of commodities at APG, the manager of the ABP pension , says that, although the benefits of investing in commodities may not seem great as before, the asset class remains attractive as inflation hedge as well as offering exposure the long-term growth raw materials demand.

“The case [for commodities investments] stands,” he says.

But Mr Houben acknowledges a shift. Passive indices been replaced by new sophisticated indices and the manager is also investing natural resources assets, including farmland, forestry, mining, oil and .

APG aims to keep about 4 percent of its 300 billion euros ($366 billion) assets under management commodities.

PGGM, manages about 125 billion euros in pension assets, has also shifted a more active approach and new commodities subclasses.

The manager has allocated 10 percent of overall commodities exposure to agriculture, direct investments in farmland and agribusinesses eastern Europe and Latin America.

Investments in farmland is attractive to “the expected low correlation of its returns other asset classes and its potential for relatively stable cash to investors”, says PGGM.

Wall Street banks have offering a new generation of products as “active” or “dynamic” indices that are able to shift their holdings the markets changes. They have also partnered trading houses such as Glencore or hedge funds as Clive Capital, offering products that allow investors to tap the market intelligence of savvier investors.

The Credit Suisse-Glencore product, example, tracks 20 commodities from Brent oil to thermal coal to sugar. Every month, Glencore will recommend changes on each commodity on its views on the underlying physical markets.

Compared with the S&P GSCI, which fallen 5 percent since the start of the year, the Credit Suisse-Glencore active index is 0.9 percent without the fees.

The bank says the fund has seen a 30 percent jump assets since January.

“Clients are now much knowledgeable and discerning,” says Kamal Naqvi, head of commodities sales at Credit Suisse. “We are seeing an increasing trend quantitative to qualitative strategies.”


Adapted and abridged from: CNBC, July 13, 2012.