The outlook for commodities is the best it’s been for a decade, according to Hermes Fund Managers, joining a long line of experts expecting more for the asset class in the coming years.
Old Mutual’s Richard Buxton
and FE Alpha Manager Barry Norris
are among the fund managers who have been increasing their exposure to commodities-related stocks in recent months. Many believe the pessimism towards Chinese demand has been overdone, and expect a sector-shift out of more expensive areas such as consumer staples and healthcare as a result.
Hermes’ Jason Lejonvarn points to quantitative indicators as a reason to be more bullish on prices, which he says is likely to give the whole sector a boost.
Recent analysis by Hermes found that a broad ‘backwardation’ – meaning current spot prices are higher than those indicated in futures contracts – of around 1.7 per cent exists across the commodity spectrum.
“Commodities in sustained backwardation indicate physical scarcity. In the past, backwardation and a positive roll yield has been a strong sign for positive commodity returns,” said Lejonvarn, who is a commodities strategist at the group.
“Sustained backwardation is unusual and a key signal for commodity investors. It indicates not only a positive roll return but an enhanced commodity risk premium overall.”
“Commodities tend to do well in the late expansionary cycle, starting from the transition point from early to late expansion. Given where we are now, we believe it is logical that commodities will be the next asset class to outperform,” he added.
For those similarly optimistic, here are three very different funds that specialise in commodities and related industries.
JPM Natural Resources
Perhaps the highest profile commodities-focused fund in the IMA Specialist sector is Neil Gregson’s £1bn JPM Natural Resources
portfolio. Launched in 1971, it is one of the oldest investment vehicles in the UK, and certainly has the longest track record of any fund of its kind.
) is diversified across base and precious metals, oil and gas, and various other commodities. Producers make up the biggest part of the portfolio because they generate more cash and are less risky than the exploration companies.
The team favours small and mid-caps with quality assets, which they inspect before making their investment decision. They also diversify by region to avoid being wiped out by a single country’s woes. The UK, US and Canada are currently Gregson’s favoured markets.
Like many natural resources funds, JPM Natural Resources had an excellent period for much of the 1990s and 2000s under previous manager Ian Henderson, but the fund has since fallen on tough times.
It is ahead of its Euromoney Gold Mining & Energy benchmark over one year, though is behind over three, five and 10 years.
Source: FE Analytics
The FE Research
team acknowledges that performance could have been better, but says an improving landscape for the commodities market should suit the fund’s investment style – particularly its focus on small and mid-caps.
Gregson is currently optimistic about a recovery in commodities prices and stocks, which he says is reflected in his high weighting to base and diversified metals. He has been bringing down his weighting to gold in recent years, however, and remains nervous about the outlook for the gold price.
M&G Global Basics
While not strictly a commodities fund, Randeep Somel’s
£3.2bn M&G Global Basics
fund’s emphasis on basic industries – particularly those associated with the urbanisation of emerging markets – means he has a high degree of exposure to the asset class.
The manager has recently upped his exposure to mining stocks from a low of 12 per cent in November to over 20 per cent at time of writing, pointing to record low P/E (price-to-earnings) multiples, attractive dividend yields and positive management changes as reasons to be particularly bullish. Top-10 positions include BHP Billiton and Australian-listed Iluka Resources.
The fund’s focus on basic industries has led it to underperform its IMA Global sector considerably since 2011, and it is currently behind over a cumulative one, three and five year period.
FE Research analyst Amandine Thierree says the five-crown rated fund is a good way to get exposure to the now historically cheap asset class, but says the recent change of manager is a cause of slight concern.
Somel took over from industry legend Graham French late last year, though has been a deputy on the portfolio since 2008.
In spite of a difficult period between 2011 and 2013, French led M&G Global Basics to strong outperformance during his tenure, delivering returns of more than 240 per cent between November 2000 and November 2013. This compares to just 43.93 per cent from the IMA Global sector average over the period.
Performance of fund and sector since 17 Nov 2013
Source: FE Analytics
Somel has had a difficult start since taking over, slightly underperforming his peer group with losses of 3.22 per cent. However, he says the cheapness of his portfolio makes him very optimistic on a medium to long-term view.
“Despite Somel being a suitable replacement at the fund’s helm and the natural heir to French, we have chosen to put the fund on hold during the transition period: we will take time to assess how its strategy is affected by the change, and the impact this has on our expectations for its future performance,” said Thierree.
Investec Enhanced Natural Resources
The distinguishing feature of Investec Enhanced Natural Resources
is its ability to short, which has allowed it to make money from stocks even in times of stress. This makes it potentially interesting for cautious investors who remain worried about downside pressures in the shorter-term.
The fund has managed to protect against the downside better than the likes of JPM Natural Resources since its launch back in May 2007, though has only just managed to break even over the period. While it’s performed well on an absolute basis during more positive times for commodities, it is likely to lag many of its rivals in a full-blown rally.
Performance of funds since May 2007
Source: FE Analytics
FE Alpha Manager Bradley George
and George Cheveley
are currently net-long, with 16 per cent of their assets in short-positions. The fund has the flexibility to increase and decrease their short exposure depending on the managers’ outlook, but there is always likely to be a sizeable chunk of assets backing stocks to underperform in share price terms.
BHP Billiton is currently the team’s biggest single stock position, at 9.2 per cent. German chemical and salt company K+S and US natural gas importer Cheniere Energy are the fund’s biggest short positions.