InvestmentsMar 19 2012

Applying active strategies to invest in commodities

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BySimona Stankovska

The commodities sector has struggled in the past few years as a result of the eurozone debt woes, a sluggish US economy and slowing growth in China.

But with an ever-increasing global population, a limited supply of resources and greater demand, returns may yet be plentiful for those investing in natural resources.

In the very short term, where more traditional economic indicators, such as GDP, are backwards looking, commodities are traded based on futures contracts.

In anticipation of a global recovery, there has been a bounce back in the market. Prices move up and down based on projected demand, so they become useful tools for peering into the near future.

Copper has become particularly useful in foreshadowing economic activity in China, which is dominated by government infrastructure spending. It is also one of the most straightforward benchmarks because generally very little affects its price other than supply and demand. It has increased in value by 6.65 per cent in the past month.

According to Index Mundi, the price of Indonesian liquefied natural gas saw the largest gain in the past 12 months, rising 65.50 per cent. Cotton, on the other hand, saw its price depreciate by more than 43 per cent.

Overall, 33 out of the 90 commodities made a gain in the past 12 months.

Accessing commodities

There are two ways of accessing commodities – through a mutual fund or an exchange traded product (ETP) that tracks the price.

Where mutual funds were once the favoured choice, with global growth continuing to recover and supply-demand fundamentals forecast to continue to tighten, an increasing number of investors are using ETPs as a convenient method of gaining exposure, according to ETF Securities.

The group says that its commodity ETPs saw the largest inflows in 10 months in March, with inflows up $256m (£163m) as strengthening fundamentals in the market drove demand from investors.

Meanwhile, natural resources mutual funds made an average loss of 15.94 per cent in the year to March 9 2012, with the Craton Capital Global Resources fund making the largest loss, of 31.16 per cent, according to Morningstar. They also saw outflows of £47m.

However, all equities had a tough time during last August’s stockmarket dip, and natural resources mutual funds invest in companies that are actively involved in economically sensitive extractive industries or their service providers, so are naturally more volatile.