Consultant bfinance investigates return of commodities

Commodity investment is back in the spotlight, says investment consultants, bfinance.

The firm writes that after a decade of poor performance, many commentators delivered a more bullish outlook for commodities during the first quarter. Such predictions are buoyed by global economic growth and some helpful market dynamics, such as the reduction in contango.
 
Goldman Sachs announced on February 1st that it expects returns of 15 per cent on its commodity index (GSCI) over the next six months and claimed that the environment for commodities was ‘the best [seen] since 2004-2008.’ Prices have surged, fallen amid the equities rout and risen again, bfinance says.
 
The firm reports that several large investors have signalled their intention to enter this often-controversial space, drawn not only by the investment outlook but by the sector’s  inflation hedging characteristics.

“The recently announced 5 per cent allocation by the influential UK National Employment Savings Trust (NEST), for example, was hailed with praise in some quarters and derision in others.

“A popular national newspaper claimed that the ‘wild west of commodities is no place for NEST’s members’ and criticised the ‘fetish’ for “so-called uncorrelated returns.

“At bfinance, we have observed notable changes in client demand. Investors with passive commodity exposures are showing greater interest in enhanced (active) systematic commodity investing, although to date we have not seen a resurgence of appetite for pure-play commodity hedge funds.

“We are also seeing strong appetite for Alternative Risk Premia, CTA and Systematic Macro strategies, many of which also involve commodity investments with a similarly systematic approach, but as part of a multi-asset schedule.”
 
Their latest paper, part of the DNA of a Manager Search series, explores one pension fund’s hunt for an enhanced commodity overlay manager.
 
According to the paper, enhanced commodity overlays offer the prospect of adding value while maintaining some ‘passive-like’ qualities: a fully systematic investment approach, total transparency of process and positions, liquidity and low costs (c. 15bps more than pure passive).
 
The paper also found that there are three major levers that managers can employ in their efforts to ‘beat the index’: contract selection, backwardation and pre-roll. The returns from backwardation and pre-roll have been muted lately but still represent a notable uncorrelated return stream, bfinance reports.
 
Finally, the firm finds that there are two routes for implementation: fund-type structures (asset managers and boutiques) and OTC swap-based solutions (banks and some index providers). Swap-based solutions tend to be slightly less expensive on an all-in basis.
 

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Beverly Chandler
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