New money flows in to sustain commodity boom
Thu Jan 13, 2005 03:18 PM GMT
By Clare Black and Barbara Lewis
LONDON (Reuters) - From pension to speculative funds, new investors are expected to accelerate the influx of fresh money into commodities this year, buying into an uptrend still in its infancy, analysts said.
Traditional assets like equities and bonds have performed poorly, spurring investment funds impatient for high-yield returns to look elsewhere.
The most significant newcomers are pension funds, who only take long positions in the market and dig in for the long term.
"The potential for new money on the investor side is the use of commodities as a diversification tool by pension funds and insurance companies," said Michael Lewis, head of commodities research at Deutsche Bank.
Analysts say gold, oil and grains will lead the pack in 2005, following last year's fund-driven surge in oil, which rose by around 30 percent, and copper, which has almost doubled in price over two years.
Traditionally cautious pension funds are particularly in need of higher returns if they are to ride a looming crisis in OECD countries, struggling to finance an ageing population.
"The population is getting older and older. Funds have got to deal with this imbalance, so they have got to increase their return," said Frederic Lasserre of SG Commodities.
Other investors such as hedge funds have been active in commodities for years, but were seen sticking around or increasing their exposure.
"This investment is strategic. That's why when the commodity indices lost value in December, you did not see these institutions selling their exposure. If anything, they added some," said Bob Greer, manager of Real Return Products at PIMCO, one of the world's leading bond investors.
TIP OF THE ICEBERG
New investors in commodities buy into index-type products, rather than directly play the physical or derivative markets.
Flows into these indices are estimated to have nearly tripled to $40 billion in around two years.
Barclays Capital Commodities Research said this was one of the fastest growing sectors of the U.S. mutual fund business, whose investments in the indices have risen from less than $300 million in 2002 to more than $7 billion now.
Yet commodities remain overshadowed by traditional investment sectors, though that is precisely why analysts see such potential for growth.
Global mutual fund assets stood at $14.41 trillion at the end of the second quarter of 2004, and equity funds accounted for 44 percent of that, money market funds 23 percent and bonds 20 percent, according to the Investment Company Institute.
LONG-TERM BUY
Some think the commodities boom could extend for up to 20 years as fundamentals remain tight because of dwindling supply and chronic under-investment, especially in oil and metals.
"The supply/demand imbalance is just horrendous and this is really underpinned by the massive under-investment that has built up over decades," said Youssef Affany, head of investment analysis and advice in Europe at Citigroup Private Bank.
Affany has advised clients to hold some commodities in their portfolio, mainly for diversification benefits, but also as he sees them as the best hedge against unexpected inflation.
Franz Wenzel, senior investment strategist at AXA Investment managers, said he has argued for a lasting commodity story for some time -- mainly in energy and base metals markets.
AXA, which has 320 billion euros under management, holds around five percent of its portfolio in commodities after cutting back its equities exposure since 2002.
It has gone underweight in metals, but remains overweight in energy and still recommends this market as a long-term buy.
Coffee, the world's second largest commodity market after oil, and sugar jumped by over 50 percent last year, but pension funds remain wary of these relatively illiquid markets.
Some investors have their eye on gold, mainly because of expectations of further dollar weakness, which has been a major factor in boosting all commodity prices.
Another dominant factor is rapid economic expansion in China. Commodities provide a way to get exposure to growth in China, where demand for raw materials has soared.
"Because pension funds are very strict in terms of risk regulation, they can't be as aggressive as hedge funds... Commodities are a very good and attractive way to go long on China," said SG's Lasserre.
© Reuters 2005. All Rights Reserved.
