The majority of funds which pursue this strategy, in vogue thanks to strong growth from commodities and natural resources driven by emerging markets, show a strong positive correlation to the FTSE 100 index.
Financial Express data shows 20 funds with exposure to natural resources and commodities, including the popular CF Ruffer Baker Steel Gold fund, BlackRock Gold & General and JPM Natural Resources funds.
The average fund in this group has a positive correlation of +0.63 per cent to the FTSE 100, meaning a movement of one per cent in the FTSE will see a move of 0.63 per cent in the same direction from the fund, removing any advantage of diversification from what is perceived to be exposure to a different asset class.
CF Ruffer Baker Steel and BlackRock Gold & General are among the minority of funds in this group which are not strongly correlated to the index, with a correlation of and +0.32 and +0.11 per cent respectively.
Further research shows a second risk, in that the majority of investors are already exposed to the stocks these funds hold via their other investments.
A simple snapshot using Financial Express Analytics shows 49 funds across sectors including UK Equity Income, UK All Companies and Europe including UK are heavily exposed to mining company Rio Tinto, for example, a favourite among commodities funds.
Fund of funds star manager Robert Burdett, who joined F&C last month, said the UK in particular was commodity heavy, and he expected correlations between commodities and the FTSE to be high.
He does not buy commodity funds because they can be very volatile.
"We don't hold any commodities funds. We have in the past held JPMorgan [Natural Resources] and BlackRock Gold & General but it's a rare thing for us to do. Commodity prices fluctuate on economic policy as much as supply and demand, which makes it difficult to predict what will drive returns, and they are too geared to the China question and emerging markets for us – that cyclical element is very hard to call."
Performance of funds over 1-yr
Source: Financial Express Analytics
Tony Yousefian, manager of the OPM Balanced Managed, Fixed Interest and Equity High Income funds, agreed. He said: "Global resources invest in companies, not usually direct commodities, so first and foremost they are equity funds."
He said investors should be wary of the volatility these funds can suffer, adding: "In the longer term if you have a positive view on resources, the best way to play that is through a global resources fund.
"You are taking on short term equity risk though, and while we see longer term there is no doubt a good backdrop for commodities to remain strong, in the short term it is not just supply and demand that drives price.
"Speculators tend to drive prices one way or the other in the short-term."
Meera Patel, senior analyst at Hargreaves Lansdown, said: "Most of the mining companies are large caps, so I'm not surprised at all to see there's a high correlation with these funds.
She too warned of the volatility inherent in these funds, and was sceptical about the near term outlook, adding: "It's incredibly volatile. You should only invest in it if you believe in the long term story – but you need to be aware that there's been a fantastic run so you can't rule out periods of weakness in the short-term."
Patel said Investec Enhanced Natural Resources offered an attractive bet in light of this outlook, explaining: "If you believe in the long term story you need to choose carefully. You could go with something plain vanilla like JPM Natural Resources, or First State Global Resources, but if I was putting money into the sector I would go for the Investec fund – it can short stocks and go long so in the current climate it’s attractive."
The research comes after a global fund manager survey published by Bank of America Merrill Lynch showed fund managers had shifted from a net overweight of +17 per cent to +21 per cent toward commodities in October.