LONDON: From gold to oil to soybeans, commodities began the year by rushing to record highs, but some big investors wonder whether the asset class is losing its appeal. After a rush of new money at the start of 2006, including from major institutions, and a more hesitant beginning to 2007, evidence has yet to emerge that the records of early 2008 were fuelled by the kind of money that commits for the long term.
In Britain, pension funds, which have been very high-profile new entrants, are showing signs of returning to their traditional caution and the ones already in the market have limited raw materials to a small percentage of their portfolio.
“In terms of making strategic allocations to commodities, it’s been very few in number. Particularly over the last 12 months. Prior to that there were bigger allocations,” said Andrew Raisman, director of marketing at Hermes Pensions Management, Britain’s biggest private sector pension fund.
“There’s very little money flowing into commodities from pension funds, at least in the UK,” Raisman said, although he said some Dutch and Swiss funds could still be buying in. Global pensions advisor Watson Wyatt was similarly wary.
“About a year ago, we came to the view that market conditions no longer made investment in commodities that attractive,” said consultant Alasdair Macdonald, adding high prices left some commodities vulnerable to a correction.
Clear evidence of whether it is short-term speculators, producers of raw materials or long-term institutional investors that are buying commodities is hard to find.
Barclays Capital analyses reported figures for exchange-traded commodity products, medium-term notes and U.S. commodity-linked mutual funds to assess the level of investment by institutions, including pension funds and insurers.
It found investment slowed in 2007, but was still the second highest to date. Commodity assets under management reached $175 billion in 2007, a rise of $41 billion over the year, compared with the record $48 billion rise in 2006, Barclays Capital said.
Barclays remains bullish, as do some other banks. “The recent robust performance of commodity assets despite the difficulties currently facing financial markets suggests further strong growth in 2008,” it said.
Others say commodities’ value as an inflation hedge is a reason to put more money in. “Inflation is mainly pushed by the rally on commodities... Generally, it makes sense for investors to look for a hedge for the rest of the portfolio by going long commodities,” said Frederic Lasserre of SG CIB. But inflation, led by rising cost of raw materials, could trigger a demand-slowing recession.
Goldman Sachs said in a note economic concerns raised the risk of investor liquidation, which could erode prices, although it predicted that “on a fundamental basis, prices will remain well-supported”. Dollar-weakness can also be interpreted as only a bullish factor for the short-term. Some players will buy dollar-denominated commodities, such as oil, which climbed above $100 in the first week of this year, to hedge against falls in the currency. But, the falling dollar could also be a symptom of recession. “While the near symmetrical divergence recently observed between currency and oil-price patterns may not be entirely coincidental, there is no compelling evidence that it is sustainable,” Antoine Halff of Newedge brokerage said in a note.
Even last year, when the oil price more than doubled, gains for some investors were eroded by an atypical oil market structure, which helped curb enthusiasm at the start of 2007.
Historically, the difficulty of storing oil has meant prompt contracts are more expensive than those for later delivery and the baskets of commodities or indexes, favoured by passive, long-term investors, base returns on rolling cheaper near-term contracts into those for less prompt oil.
But the Organization of the Petroleum Exporting Countries’ (Opec) policy to pump flat out helped to reverse the market structure from backwardation to contango, eroding index returns.
Opec in late 2006 began to rein in production, helping over time to bring the oil market back into backwardation, although some remain unconvinced that makes oil a long-term buy.
“While we are a bit more positive on the contango versus backwardation front, we are probably less positive on the outlook for spot prices. Putting that together, we are not convinced that our negative view on commodities has materially changed,” said Macdonald of Watson Wyatt.
That does not mean investors will abandon the asset class.
Some have changed their strategy to use actively-managed positions, as well as the long-only index approach.
To an extent, commodities are a victim of their own success. No sooner has their value as a portfolio diversifier become widely-held than fund managers were asking whether they are in danger of behaving like more mainstream assets.
“If you speak to pension funds consultants... they are not as convinced that commodities are truly as uncorrelated with other asset classes as they have seemed to be in the past,” said Raisman at Hermes.
“Over the long term, they also find it very difficult to forecast commodities’ returns higher than cash,” he added.
In Britain, pension funds, which have been very high-profile new entrants, are showing signs of returning to their traditional caution and the ones already in the market have limited raw materials to a small percentage of their portfolio.
“In terms of making strategic allocations to commodities, it’s been very few in number. Particularly over the last 12 months. Prior to that there were bigger allocations,” said Andrew Raisman, director of marketing at Hermes Pensions Management, Britain’s biggest private sector pension fund.
“There’s very little money flowing into commodities from pension funds, at least in the UK,” Raisman said, although he said some Dutch and Swiss funds could still be buying in. Global pensions advisor Watson Wyatt was similarly wary.
“About a year ago, we came to the view that market conditions no longer made investment in commodities that attractive,” said consultant Alasdair Macdonald, adding high prices left some commodities vulnerable to a correction.
Clear evidence of whether it is short-term speculators, producers of raw materials or long-term institutional investors that are buying commodities is hard to find.
Barclays Capital analyses reported figures for exchange-traded commodity products, medium-term notes and U.S. commodity-linked mutual funds to assess the level of investment by institutions, including pension funds and insurers.
It found investment slowed in 2007, but was still the second highest to date. Commodity assets under management reached $175 billion in 2007, a rise of $41 billion over the year, compared with the record $48 billion rise in 2006, Barclays Capital said.
Barclays remains bullish, as do some other banks. “The recent robust performance of commodity assets despite the difficulties currently facing financial markets suggests further strong growth in 2008,” it said.
Others say commodities’ value as an inflation hedge is a reason to put more money in. “Inflation is mainly pushed by the rally on commodities... Generally, it makes sense for investors to look for a hedge for the rest of the portfolio by going long commodities,” said Frederic Lasserre of SG CIB. But inflation, led by rising cost of raw materials, could trigger a demand-slowing recession.
Goldman Sachs said in a note economic concerns raised the risk of investor liquidation, which could erode prices, although it predicted that “on a fundamental basis, prices will remain well-supported”. Dollar-weakness can also be interpreted as only a bullish factor for the short-term. Some players will buy dollar-denominated commodities, such as oil, which climbed above $100 in the first week of this year, to hedge against falls in the currency. But, the falling dollar could also be a symptom of recession. “While the near symmetrical divergence recently observed between currency and oil-price patterns may not be entirely coincidental, there is no compelling evidence that it is sustainable,” Antoine Halff of Newedge brokerage said in a note.
Even last year, when the oil price more than doubled, gains for some investors were eroded by an atypical oil market structure, which helped curb enthusiasm at the start of 2007.
Historically, the difficulty of storing oil has meant prompt contracts are more expensive than those for later delivery and the baskets of commodities or indexes, favoured by passive, long-term investors, base returns on rolling cheaper near-term contracts into those for less prompt oil.
But the Organization of the Petroleum Exporting Countries’ (Opec) policy to pump flat out helped to reverse the market structure from backwardation to contango, eroding index returns.
Opec in late 2006 began to rein in production, helping over time to bring the oil market back into backwardation, although some remain unconvinced that makes oil a long-term buy.
“While we are a bit more positive on the contango versus backwardation front, we are probably less positive on the outlook for spot prices. Putting that together, we are not convinced that our negative view on commodities has materially changed,” said Macdonald of Watson Wyatt.
That does not mean investors will abandon the asset class.
Some have changed their strategy to use actively-managed positions, as well as the long-only index approach.
To an extent, commodities are a victim of their own success. No sooner has their value as a portfolio diversifier become widely-held than fund managers were asking whether they are in danger of behaving like more mainstream assets.
“If you speak to pension funds consultants... they are not as convinced that commodities are truly as uncorrelated with other asset classes as they have seemed to be in the past,” said Raisman at Hermes.
“Over the long term, they also find it very difficult to forecast commodities’ returns higher than cash,” he added.
No comments:
Post a Comment