Geoff Candy: Active Commodity Management Growing in Stature

GRONINGEN – As an asset class, commodities have grown up quite significantly lately. Like a teenager who hits puberty and suddenly shoots up in height, so the range of options available to commodity investors now has seen a similar growth spurt.

And, it seems, investors are beginning to make use of these opportunities. According to a report by Barclays Capital called, “The commodity investor: dropped but not broken” the bank examines the performance of a number of these new product types, as writes: “Demand for active management by commodity investors is higher than it has ever been. Our recent Commodity Investing Survey shows that over 60% of the investors we surveyed in March are planning to use active strategies as the main way to invest in commodities over the next 12 months.”

Part of the reason for this growth in demand for active strategies, the bank says, is because of the maturation of the market.

“Although it took time for commodity investments to catch on, assets under management rose from less than $10bn at the start of the last decade to over $400bn currently. The cumulative experience of managing commodity exposure over the course of several cycles means that investors have a better understanding of the asset class and the factors that drive performance, such as changing fundamentals in individual markets and variations in shapes of futures curves.

Another reason, the report explains is that “many investors now have mandates permitting them to seek varying levels of outperformance or tracking error relative to their passive benchmarks.”

According to Barcap, there is also a perception that commodity markets are especially suitable for the application of active strategies. This is because while equity managers have a long track record of failing to beat their bench marks, commodity managers are relatively new which means ” the data that might prove conclusively that things are different in the asset class is somewhat sparse.”

This perception, when married to the current macro economic conditions provide good reason for investors to look at active management.

As the report explains, ” Markets are currently at a stage where the strength of the recovery from the deep global recession of 2009 is ceasing to be the main factor in driving returns and a much wider dispersion in outcomes for individual markets is evident. This is clear from the much lower level of correlation in price moves between different commodities recently. For example, in the year-to-date while agriculture, energy and precious metals sector returns are in positive territory, base metals and livestock sectors are all negative to varying degrees.”

However, before rushing off to find an actively managed portfolio it is important to note that, while actively managed investment strategies are growing in stature, flows into the more-established, passive products continue to grow apace. And, secondly, while the market is maturing, it has yet to reach a point where the availability of data is such that clear and accurate comparisons across the board are possible.

But, as Barcap points out, ” Due to the rapidly growing demand for active exposure and the highly competitive environment that exists in serving this sector, we expect that data availability will improve over time.”

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