How to play the commodities correction

Author: Joanna Faith
Professional Adviser | 19 May 2011 | 08:00

Categories: Commodities

Topics: portfolio planning| ETF| China| India| | psigma| Rathbone

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Industry experts talk to Joanna Faith about how investors should position their portfolios in light of the commodities sell-off.

Fund experts are urging investors not to run for the exits after the recent dramatic commodities sell-off which saw the sharpest one-day loss in more than two years.

The industry was reminded just how volatile the asset class can be when markets were rocked by a sharp correction that saw oil plummet by more than $7 a barrel, copper fall to a five-month low and silver nosedive.

However, commentators said long-term investors should not rush to trim commodities’ positions.

Simon James, partner at Gore Browne Investment Management, said although there are reasons for caution on commodity prices in the short term, the longer term story remains intact.

“The story is driven by growing demand due to demographics, urbanisation and increasing emerging market wealth but supply is constrained by the dearth of investment over a long period of time, and by the depletion of the most easily accessible resources,” he said

Meanwhile, Martin Arnold, senior analyst at ETF Securities, said cutting commodity positions is likely to reduce portfolio diversification benefits that such investments provide.

He also highlighted the long-term commodities story, saying “the voracious appetite” for raw materials in emerging markets will continue to underpin global demand in coming years as the “nascent industrialisation process” in countries like China and India gathers momentum.

Elsewhere fund managers said the recent correction had presented significant buying opportunities.

As a result of the correction, Nicolas Robin, co-manager of the Threadneedle (Lux) Enhanced Commodities fund, is buying further into commodities and is particularly bullish on energy.

He believes the supply disruptions on the back of the Libyan conflict will endure, while the earthquake in Japan and its impact on the nuclear industry places long-term upward pressure on demand.

Tom Becket, manager at PSigma, is also positive on the energy sector, where he believes macroeconomic developments and the global push for increased long-term demand is likely to create some lucrative opportunities, despite expected extreme volatility.

He has, however, recently pared down his holdings in gold and his exposure to soft commodities on the belief these investment themes had risen too quickly.

Meanwhile Fabien Weber, fund manager of the JB Commodity fund at Swiss & Global Asset Management, said although the correction resulted in a loss of nearly 10%, fundamentals are still supportive for most commodities, even if the macroeconomic picture is challenging.

However, he said the intrinsic value among commodities is becoming more diverse.
“It is no longer a one-way bet and active differentiation between assets is required.”

While the recent sell-off may present buying opportunities, some multi-managers are more cautious on the asset class.

David Coombs, head of multi-asset investments at Rathbone Unit Trust Management, said investors should cut back their commodities exposure.

“The correction is healthy as much froth had built into prices, and was increasingly unreflective of global growth and demand. This is a pause for breath,” he said.

“The high prices are not sustainable, meaning investors should be cutting back on their commodities exposure if they haven’t already done so.”

Meanwhile Paul Kim, head of multi-manager at LVAM, said the decision to trim exposure should depend on the person’s risk tolerance and investment time horizon.

“If looking to the longer term, I would say stay with commodities as general views on supply and demand do look favourable,” he said.

“However, in the short-term we will, I am sure, see more volatility in the prices of commodities as investor confidence waxes and wanes.”

His advice to investors is to remember risk and reward go hand in hand and this is crucial when deciding on commodities constituents for their portfolios.

 

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