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Gleeson: Why I don’t hold commodities funds

The head of FE Research says funds such as JM Finn Global Opportunities and M&G Global Basics offer a much safer way to get access to this area of the market.

Joshua Ausden

By Joshua Ausden, Editor, FE Trustnet
Friday November 15, 2013

An unconstrained global fund offers the most effective way to access the commodities story, according to head of FE Research Rob Gleeson, who thinks everyday investors should avoid physical commodities funds and ETFs. ALT_TAG

Gleeson (pictured) thinks there are plenty of reasons to be interested in investing in commodities, but says that holding them directly is a high-risk strategy, illustrated by the terrible time many have endured in recent months.

On the other hand, he believes a global manager who is willing to invest in this area of the market has the flexibility to amend their focus when times get tough.

"I’m personally not a fan of physical commodities funds – in general I don’t think they’re a good strategy," Gleeson said. "I’d rather get my exposure to commodities via a global fund."

"A good fund manager should be able to realise where we are in the commodities cycle and benefit from it accordingly. Funds such as JM Finn Global Opportunities benefited hugely from this in the 2000s, but then had the flexibility to look elsewhere when commodities came under pressure. Funds with a pure commodities mandate can’t do this."

As Gleeson suggests, FE Alpha Manager Anthony Eaton’s JM Finn Global Opps portfolio had a strong run from its launch in January 2004 until the beginning of 2011, aided by its high exposure to companies that rely on the performance of commodities.

Graham French’s
M&G Global Basics fund also performed strongly over the period, for very similar reasons.

While both funds closely followed the S&P GSCI Commodities Spot index up until 2011, they have since protected better against the downside, during a period when commodities have struggled.

Performance of funds and index since Jan 2004


Source: FE Analytics

Gleeson says this element of protection makes the JM Finn and M&G funds a much better option than an ETF.

"Funds like these are commodities funds of sorts, and I like that, but they have a broader remit than just speculating on commodity prices," Gleeson said.

"Commodity ETFs and the like are not suitable for the average portfolio in my opinion."

Gleeson is also wary of actively managed commodities funds such as BlackRock Gold & General and JPM Natural Resources, which split their assets between physical commodities exposure and equities that are tied to the commodities market.

ALT_TAG He acknowledges that managers Evy Hambro (pictured) and Neil Gregson can chop and change their portfolios depending on where they see opportunities, but says these two funds are only suitably for investors with very strong views about the direction of commodities.

"There are good reasons to invest in physical commodities, and both those funds have a place, but for most people a more diversified mandate is better because physical commodities are so volatile," Gleeson continued.

"People looking for commodities exposure can get that through a global fund for less risk."

FE data shows that both JPM Natural Resources and BlackRock Gold & General have had a terrible time of late, losing 34.17 and 54.42 per cent over a two-year period, respectively.

Although JM Finn Global Opps and M&G Global Basics have underperformed their IMA Global sector average, they have protected much better against the downside and have also been less volatile.

Performance of funds and sector over 2yrs


Source: FE Analytics

French told FE Trustnet earlier this year that his decision to take out commodities exposure from the fund has helped protect the fund from major losses.

"Materials and mining and emerging markets have been just about the worst place to be invested. This fund could have quite easily produced a negative return of 20 per cent had it remained static and not fluid," he said.

"Commodities now in this fund are a smaller contributor to performance, but were significant for the first 10 years [I was running it]."

Although commodities have had a very tough time of late, some managers are beginning to see value in the sector.

Schroders’ Marcus Brookes and Robin McDonald, who head up Cazenove Multi Manager Diversity, have recently added JPM Natural Resources to their portfolio.

Julie Dean
, who runs the Cazenove UK Opportunities fund, has also recently upped her exposure to commodities, and includes Rio Tinto and Glencore Xstrata in her top-10 holdings.

However, in general commodities remain an underweight position for the majority of equity and multi-asset managers, who believe there could be further downside for the sector.


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Data provided by FE. Care has been taken to ensure that the information is correct, but FE neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.

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