NEW YORK Institutional investors are likely to substantially boost commodity holdings in 2008, as steadily rising demand for energy, metals and agricultural products should keep this asset class in the spotlight, analysts at Barclays Capital, the investment banking arm of London-based Barclays Bank PLC, predicted.
The analysts outlook was based on a survey of more than 150 institutional clients who attended Barclays Capitals third annual U.S. Commodities Investor Conference in New York in early December. The clients included asset managers at banks, endowments, hedge funds, insurance companies and pension funds who are interested in commodities-related investments, given the rally that sent energy, precious metals and agricultural prices to new highs in 2007.
We believe this trend will continue as the asset class grows, Benoit de Vitry, Barclays Capital managing director and head of commodities, emerging markets and quantitative analytics, told a Dec. 5 press briefing where he presented the results of the survey.
Besides enjoying strong fundamentals, commodities also often act as safe-havens in times of geopolitical uncertainty, which traditionally unsettle global equities. News of the assassination of Pakistan opposition leader and former Prime Minister Benazir Bhutto on Dec. 27 pushed a number of commodities prices close to their recent highs, while equities retreated.
There is a very useful negative correlation (between the asset classes), Kevin Norrish, a director in Barclays Capitals commodities division, said at the briefing. We believe the commodities bull market is still in its early stages.
Barclays assessment about the negative correlation between equities and commodities is supported by a research paper the Commodity Futures Trading Commissions Office of the Chief Economist released on Dec. 19.
The CFTC report, titled Commodities and Equities: A Market of One? showed no statistical evidence of any long-run relationship between the benchmark commodity and equity indexes for the period 1991-2007.
The Barclays survey showed that half of the investors surveyed expected to have more than 10% of their overall portfolios in commodities over the next three years. Just two years ago, a similar Barclays survey had found that only 15% of investors intended to invest more than 10% of their fund in commodities.
Mr. Norrish also noted that most investors surveyed expected to hold investments in commodities for three years or longer an expectation of a lasting bull market for that asset class.
The main drive for investing in commodities was absolute performance, given the high rates of return, rather than simply portfolio diversification.
As an example, platinum futures have gained nearly 40% in 2007, setting a record of $1,551.50 an ounce on Dec. 26 because of sluggish output in South Africa, a leading producer.
One difficulty with investing in commodities is that it involves multifaceted research, from the weathers impact on crops to geopolitical developments.
For instance, soybean futures are closing in on their 1973 record of $12.90 a bushel on an Agriculture Departments December estimate that U.S. soybean farmers have already sold 75% of their total expected exports for the 12 months through June 2008.
Some of the worlds most sophisticated investors, mostly institutions or hedge funds, are heavily invested in commodities, Mr. Norrish said, adding that managers used active strategies as well as structured products for their commodities portfolios.
Commodities are a very good insulator in times of market stress, Mr. Norrish added, pointing to data that showed the Standard & Poors GSCI commodities index gaining 23% from Sept. 1, when the subprime crisis started spreading through markets, to Dec. 1, while the S&P 500 stock index lost more than 3%.
The Barclays survey showed a major shift into commodities among the investors polled. In 2007, 50% of respondents said more than 10% of their portfolio is invested in commodities, up from 43% of respondents in 2006 and 18% in 2005. Also in 2007, only 23% of respondents said they had less than 5% invested in commodities, down from 26% in 2006 and 39% in 2005. That means investors who ventured into that asset class two years ago are now increasing their positions.
Forty-five percent of investors polled expected the best returns in agricultural commodities; 19% in precious metals; 18% in energy, amid predictions of $100-a-barrel oil; 10% in livestock; and 8% in industrial metals.
Even though active management has become the preferred strategy, many investors in commodities started with low-cost, easy-to-use exchange-traded funds that simply track a commodities index. The top five ETFs in that sector have $130 billion pegged to them, up from just $5 billion in 1999, according to CFTC data.
Investors also are interested in moving into the still-emerging environmental markets, in particular carbon emissions contracts. Responding to the trend, NYSE Euronext is acquiring the French market Powernexts carbon-emission business to create a regulated global market in CO2 emission permits. Industry analysts expect this market to grow to nearly $60 billion by 2012, from about $30 billion in 2006. Other exchanges, such as Chicago-based CME Group Inc. and Nymex Holdings Inc., the parent of the New York Mercantile Exchange, have announced plans to develop CO2 markets as well.