Inflation fears drive commodities stakes

Inflation fears drive commodities stakes

Multi-managers are tip-toeing into commodities to protect their funds against an anticipated uptick in inflation.

Expectations have increased in recent weeks that inflation could rise more quickly and higher than previously anticipated. Bank of England governor Mark Carney has predicted a 1 per cent rate by the end of the year.

The fears about rising prices come as the UK registered its first negative consumer prices index (CPI) reading since 1960 last month.

Article continues after advert

While strategic bond managers have been buying up inflation-linked and shorter-dated bonds, multi-asset managers have favoured commodities.

Trevor Greetham, head of multi-asset at Royal London Asset Management, is looking to add a small commodities component to his portfolios.

He said: “To protect against inflation you’d normally buy index-linked gilts, but while they are going to do better than regular gilts, that doesn’t mean they will do well.

“If we get an inflation shock it’s going to be linked to oil, which is playing an interesting role. So I’m looking to add a small exposure to commodities, which will probably be a tracker [fund].”

While Mr Greetham thinks a passive allocation to commodities is best, other managers argue commodities require a more direct approach.

Tommaso Mancuso, head of multi-asset at Hermes Investment Management, said: “While there is a strong relation between [commodity] assets and inflation, the relationship fluctuates through the cycle.”

In the past few months he has increased his allocation to energy commodities from 1.5 per cent to 4 per cent as he thinks the inflation swings are largely driven by energy prices.

Prices have been falling across the spectrum of commodities.

The price of a barrel of Brent crude oil more than halved between mid-2014 and the start of 2015, before recovering in recent months, while the price of a tonne of iron ore has fallen consistently month on month since the start of 2014.

David Jane, multi-asset manager at Miton, said he thought an “argument could be made for [investing in] agricultural commodities”, but is cautious on commodities in general, concerned that they are being driven by many factors besides inflation, such as supply and demand dynamics.

These supply and demand issues make other managers bearish on the asset class too.

JPMorgan Asset Management’s multi-asset portfolio managers, Nick Roberts and Tony Lanning, said they were also cautious about investing in direct commodities because of concerns about “slowing Chinese demand for raw materials, a stronger dollar this year and the supply glut in oil”.