How to gain exposure to booming natural resources
By Beverly ChandlerPublished: February 20 2011 15:55 | Last updated: February 20 2011 15:55
The simple act of filling the car up at a petrol station hammers home the point that commodity prices are soaring and investors of all types want to know how to convert that noticeable extra domestic expense into investment returns.
But commodities are not the easiest thing to access. Nick Sketch, senior investment director at wealth manager Rensburg Sheppards, explains: “The issue with commodities is to which story are you trying to get exposure? Take oil – if I want to invest in oil, do I want to buy the equity of the producers, the futures of the commodity or related equities? What you are never going to buy is a barrel of oil.”
Alex Moiseev, principal and chief investment officer of $230m Dighton Capital, predicts further rises. “Within two to three years maximum, oil will be at $200 a barrel. We have years to go in the commodity bull run – three to five years at least,” he says.
Many fund managers use commodities in portfolios as hedges against inflation, says Chris Hills, chief investment officer at Rensburg Sheppards: “They are not there for reward but as insurance against higher than anticipated inflation.”
Mr Sketch adds: “Commodities shouldn’t produce more value over the long term. A lump of gold is not going to grow.” For Mr Sketch, the principal value of commodities is not in their productive activity in a portfolio but in their inefficient pricing in the market.
“If someone will give me a pound for 85p, then it is always worth it,” he says, adding that he is primarily an equity investor and a key route to commodity investment is through mining sector equities.
He makes most of his commodity investments through specialist funds. “It’s hard for non-specialists to do the research – the key decision-makers are often nowhere near the UK, and volatility is very high. Why do it at all if you don’t have to?” he asks.
In terms of funds, exchange traded products providing access to commodities have enjoyed the recent uptick in interest in the sector. But it is the actively traded commodity funds that have enjoyed the most growth and investment return.
The Newedge Commodity Trading Index shows that actively managed commodity funds outperformed last year, returning 10.65 per cent, against the S&P Goldman Sachs Commodities Index return of 9.03 per cent.
Several new funds have been launched recently. Armajaro Asset Management, with $1.8bn under management, has added a sixth fund to its range of commodity and natural resource related funds.
Managed by ex-Brevan Howard portfolio manager Nick Glinsman, the Armajaro Natural Resources Fund is a global macro long short fund investing in commodity-related equities, looking at the relationships between mining companies against refiners, food producers against food manufacturers, or gold versus miners.
Another, the Natural Resources Fund managed by Julian Treger of Audley Capital, which has $1bn under management, launched in December 2010 and has achieved close to 5 per cent returns already.
Mr Treger approaches the sector as a commodity specialist and a “friendly” activist. For the Natural Resources fund, Mr Treger has just taken a significant stake in a diamond pipe in Lesotho, and will bring his brand of corporate management to the company.
“It’s particularly applicable to the mining sector because in general miners are talented geologists and explorers but the average quality of their business skills is lower. So we try to help companies with financial engineering, raising capital, corporate governance, investor relations, public relations, strategy and so on. It’s all about transforming companies to realise their potential,” says Mr Treger.
He predicts huge future demand for funds such as his. “But I don’t know how many other people have the skill set. You need a good underlying understanding of commodity demand and have to apply a corporate transformation skill set to find the right companies to work on.”
Kevin Arenson is chief investment officer at $3.5bn fund of funds group Stenham Asset Management, which has a dedicated natural resources fund of funds and sees many of the new style commodities managers. “We are finding a greater universe of managers to select from so we have new managers in the portfolio, but we have to sift through the universe and find one that suits our risk/ reward trade off,” he says.
Looking forward, Mr Arenson and Mr Sketch both see a potentially bumpy ride for commodities, but no big correction. Mr Sketch says: “All of this is a play on the Asian growth story – if you buy commodity exposure, you can be buying the Asian growth story – I don’t disbelieve it but I am cautious.”
But commodities are not the easiest thing to access. Nick Sketch, senior investment director at wealth manager Rensburg Sheppards, explains: “The issue with commodities is to which story are you trying to get exposure? Take oil – if I want to invest in oil, do I want to buy the equity of the producers, the futures of the commodity or related equities? What you are never going to buy is a barrel of oil.”
Whichever route the investor takes, the sector is enjoying a dramatic bull run. Copper hit its all-time highest price on February 15, reaching $10,190 a tonne, while oil has surged through $100 a barrel.
Many fund managers use commodities in portfolios as hedges against inflation, says Chris Hills, chief investment officer at Rensburg Sheppards: “They are not there for reward but as insurance against higher than anticipated inflation.”
Mr Sketch adds: “Commodities shouldn’t produce more value over the long term. A lump of gold is not going to grow.” For Mr Sketch, the principal value of commodities is not in their productive activity in a portfolio but in their inefficient pricing in the market.
“If someone will give me a pound for 85p, then it is always worth it,” he says, adding that he is primarily an equity investor and a key route to commodity investment is through mining sector equities.
He makes most of his commodity investments through specialist funds. “It’s hard for non-specialists to do the research – the key decision-makers are often nowhere near the UK, and volatility is very high. Why do it at all if you don’t have to?” he asks.
In terms of funds, exchange traded products providing access to commodities have enjoyed the recent uptick in interest in the sector. But it is the actively traded commodity funds that have enjoyed the most growth and investment return.
The Newedge Commodity Trading Index shows that actively managed commodity funds outperformed last year, returning 10.65 per cent, against the S&P Goldman Sachs Commodities Index return of 9.03 per cent.
Several new funds have been launched recently. Armajaro Asset Management, with $1.8bn under management, has added a sixth fund to its range of commodity and natural resource related funds.
Managed by ex-Brevan Howard portfolio manager Nick Glinsman, the Armajaro Natural Resources Fund is a global macro long short fund investing in commodity-related equities, looking at the relationships between mining companies against refiners, food producers against food manufacturers, or gold versus miners.
Another, the Natural Resources Fund managed by Julian Treger of Audley Capital, which has $1bn under management, launched in December 2010 and has achieved close to 5 per cent returns already.
Mr Treger approaches the sector as a commodity specialist and a “friendly” activist. For the Natural Resources fund, Mr Treger has just taken a significant stake in a diamond pipe in Lesotho, and will bring his brand of corporate management to the company.
“It’s particularly applicable to the mining sector because in general miners are talented geologists and explorers but the average quality of their business skills is lower. So we try to help companies with financial engineering, raising capital, corporate governance, investor relations, public relations, strategy and so on. It’s all about transforming companies to realise their potential,” says Mr Treger.
He predicts huge future demand for funds such as his. “But I don’t know how many other people have the skill set. You need a good underlying understanding of commodity demand and have to apply a corporate transformation skill set to find the right companies to work on.”
Kevin Arenson is chief investment officer at $3.5bn fund of funds group Stenham Asset Management, which has a dedicated natural resources fund of funds and sees many of the new style commodities managers. “We are finding a greater universe of managers to select from so we have new managers in the portfolio, but we have to sift through the universe and find one that suits our risk/ reward trade off,” he says.
Looking forward, Mr Arenson and Mr Sketch both see a potentially bumpy ride for commodities, but no big correction. Mr Sketch says: “All of this is a play on the Asian growth story – if you buy commodity exposure, you can be buying the Asian growth story – I don’t disbelieve it but I am cautious.”
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