My interest in commodities was recently piqued after receiving some emails from well-meaning individuals within the fund sales community, pointing out that their commodity funds were, by far, the best performing funds year to date and I should, of course, be assessing these portfolios.
In my view, a healthy dose of skepticism is required for those undertaking fund research, so a little more digging (excuse the pun) was required.
While the year-to-date performance of these products is undoubtedly stellar, it does not make up for the horrific performance produced by the asset class over any meaningful medium-term time period. Nonetheless, further assessment of the asset class was merited.
One of my many bugbears in our industry is the prevalence of confusing terminology, particularly when the same thing means something different depending on who’s interpreting it.
For the most part, when referring to commodities, our industry – unfortunately, in my view – speaks of equity investing rather than direct and proper commodity exposure.
Therefore, my starting point is what do we mean by commodity investing. I am quite dogmatic in my approach here; for me, the phrase does not mean investing in commodity equities, but, rather, accessing the real asset class, which is difficult to do.
Commodity equity investing is just that. I would rather my generalist equity managers took a view on my behalf here, as they do with other sectors such as technology, healthcare and financials, by way of examples. Therefore, those funds highlighting their strong performance credentials are no more than equity-specialist funds performing on the back of a bear rally.
Real commodity exposure, while harder to achieve due to the limitations of accessing the real assets, is not impossible for the retail investor. But, due to regulatory restraints, it can only be done through the futures market, based on indices.
Commodity equities have had a fantastic start to the year, but does that mean that this trend will continue, and should one, therefore, buy a commodity fund?
The question we should ask is, “where are we now?” Experience tells me that consensus is much better at predicting commodity price rises, especially after savage sell-offs. But no one, as far as I can tell, predicts sell-offs, particularly those as aggressive as seen in the oil market during 2014-15.
It is hard to argue against there being value within the market at this point, but spot commodity prices can, and have, moved on a supply-side collapse and modest demand improvement.
There is no denying that the market, while volatile, has improving fundamentals; however, is there enough risk versus reward to entice the multi-asset investor at this point?
Probably not, but if I were to invest I would use the Threadneedle Enhanced Commodities fund.
James Calder is research director at City Asset Management
