Investors get active over commodities
Institutional investors are growing weary of traditional commodities index investing, leading some to turn to other ways of capturing the long-term benefits of the asset class with less of the short-term volatility.
“The concept of commodities risk premia is emerging,” said Kevin Norrish, London-based managing director of commodities research at Barclays PLC. “Investors are applying the risk-return framework of other asset classes - such as equities - to commodities as an asset class.”
Smart beta as applied to commodities is gaining traction, as well as active strategies that move along the futures curve or shift exposures among different commodities, sources said. Another key development is to combine commodities index exposure with underlying real assets.
The $7.8 billion Municipal Employees' Retirement System of Michigan, Lansing, is considering reducing exposure to passive and enhanced commodities indexes in favor of commodities-linked real assets, said Chief Investment Officer Jeb Burns.
The fund's asset allocation review is not expected to be completed until July, and decisions have not been finalized. The total commodities portfolio likely will remain the same or will increase slightly. However, the enhanced indexing portion of the portfolio will probably fall to a “foundational” 2% or 3%, with the remainder invested in real assets, Mr. Burns said.
“We believe in the long-term growth in commodities due to changing (global) demographics, growth in emerging markets economies and other factors that will contribute to greater demand,” Mr. Burns said.
However, some of the short-term benefits of accessing commodities through indexing have diminished, he said
In 2012, the fund embarked on a new commodities strategy by adding real assets with an existing enhanced indexing approach. Michigan Municipal Employees committed $180 million to directly invest in cattle and sheep ranches in Australia to be managed by Australian Pastoral Funds Management. Funding came from decreasing its 5% allocation to the enhanced commodities indexing strategy.
Simon Fox, London-based principal within Mercer's alternatives boutique, said: “We have a preference toward real assets as a way of gaining exposure to commodities and the underlying commodities prices. The attraction for us is that (real assets) provide an additional return driver on top of the commodities spot price exposure.”