Agriculture This is very much a supply-and-demand game; with the world population on the increase and grain consumption on the rise, farmers are struggling to keep up and costs are expected to increase as a result.
While Martin Arnold of ETF Securities acknowledges that agriculture is a high-risk investment, he says it is one of the few truly uncorrelated plays in the commodities market.
"The sector has absolutely no link to the business cycle whatsoever," said Arnold. "It’s a low-Beta play that is more reliant on the weather than the markets."
"Arable land per person is falling rapidly, while an uptake in biofuels is also taking its toll on supply/demand dynamics."
"Most recently, adverse weather conditions have had a marked effect on costs, which we’ve seen in Australia and Russia, for example. If this shift was to continue, and many seem to think it will, I think we could see the agriculture sector become more mainstream."
Those looking to gain exposure to agriculture may wish to hold an ETF – for example, ETFS Wheat – or an open- or closed-ended fund that invests exclusively in the sector.
Performance of funds vs index over 2-yrs
Source: FE Analytics
However, the likes of First State Global Agribusiness and Sarasin AgriSar are far more correlated to the equity market than ETFs, since they invest in stocks.
Hedge-fund strategies
"A good macro hedge-fund manager like Hugh Hendry is a very good bet when it comes to diversification," said Mark Wright, who heads up the CF Midas Balanced Growth portfolio. "The CF Eclectica Absolute Macro fund has been very effective."
"If you’ve got a manager who has a lot of experience in macro management, this kind of fund will always be lowly correlated."
CF Eclectica Absolute Macro is an example of a portfolio that has taken advantage of the UCITs III directive, which allows retail funds to use a wider range of investment instruments usually associated with hedge funds.
Performance of fund vs sector and index since launch
Source: FE Analytics
According to FE data, the fund has returned 12.02 per cent since its launch in December 2009.
Volatility ETFs
"You may also wish to go long on a volatility index, such as the VIX," continued Wright. "At the moment we’ve got exposure to a European volatility index, which should give us a good hedge if the situation worsens."
"When equity markets sell off, volatility increases, so presumably a product such as this will give us some protection."
There are a number of products that use the VIX in the global ETF universe, such as Source S&P 500 VIX Futures.
Government bonds
While much has been said about the riskiness of low-yielding government bonds, Wright says they remain a good hedge at this point.
"Most government bonds, most notably German Bunds, have behaved exactly as expected – as equities fall, bonds have rallied and yields tightened," he commented. "The main issue now is that there is a major difference between strong bonds and weak bonds, so it is important to keep a focus on quality."
Performance of sectors over 1-yr
Source: FE Analytics
While the vast majority of multi-asset managers have opted to avoid the gilt market in the last year or so, the asset class has continued to do well amid the enduring market uncertainty. According to FE data, UK Gilt is the best performing IMA sector over a 12-month period, with returns of 15.66 per cent.
Cash
"This, for me, is the only genuine safe haven asset," said FE Alpha Manager Martin Gray, who heads up the sector-leading CF Miton Special Situations Portfolio.
"People see it as a weakness in a portfolio, but I see it as an asset class in its own right. If you’re nervous about the markets there’s no point in holding equities for the sake of it. There seems to be an obsession with equities in our culture."
"If you have some cash and the markets fall, you also have the added bonus of picking up bargains more easily," he added.