There are no winners in a war, but investors who held commodities in their portfolios in recent weeks were able to limit their losses, writes Morningstar’s Thomas De fauw in his Top 5 contribution for this week. Prices for energy, metals and agricultural products have been rising.
The upward trend in commodity prices did not start when Putin’s army invaded Ukraine, but started last year as part of the “reflation trade”, an industry term for an upturn in the economic cycle in which both growth and inflation accelerate, usually - but not necessarily - after a recession. At one point they were seen as the last remaining cheap asset class. Things can change, because now investors are attaching a geopolitical risk premium to these assets.
One of the most popular indicators of the commodities market is the Bloomberg Commodity Index (BCOM), which consists of exchange-traded contracts for physical commodities. This index increased over the last 12 months by 45.3 percent measured in euros at the end of February 2022 and by more than 25 percent since the start of the year.
Traditionally, this index is divided into several groups, including energy (30 percent), grains (22.6 percent), precious metals (20 percent), industrial metals (15.5 percent), agricultural commodities including coffee, cotton and sugar (7 percent) and livestock (5.3 percent). By far the most important commodities in this index are gold (15 percent) and crude oil (15 percent - WTI plus Brent). Bloomberg announced the weightings for 2022 last November.
Volatile oil markets
In the 2020 pandemic year, crude oil prices plummeted to record lows and even briefly went negative. WTI rose some 32 percent since the war in Ukraine began on 24 February 2022, but corrected afterwards. The upward pressure on prices, unlike during the commodities supercycle of 2000-2008, does not seem to have been driven by a sudden and massive surge in demand for commodities from China, but rather by the supply side.
Initially, traders considered the possibility that the war in Ukraine could disrupt the supply of essential commodities, and later the US and UK embargo on Russian oil imports was added. Last month, Shell and BP also announced their intention to leave Russia, an example of how companies are increasingly meeting higher ESG standards.
Withdrawing from a country for political-ethical reasons is seen as a form of good corporate governance. This sustainability doctrine is also currently criticised for being partly responsible for higher energy prices. After all, the fight against climate change means that the sector is investing less and less in new fossil fuel supplies, while demand is rising, especially from emerging markets.
More than oil
But not only oil caused a rise in the BCOM index, also the price of gold rose above 2,000 dollars per ounce and seems to be on its way to a new record price according to many technical analysts. In this respect gold seems to be living up to its status as a protective asset once again.
The conflict itself and the sanctions against Russia are also causing disruption in other commodity markets, especially in wheat, while rising energy costs are in turn affecting, among others, the cost of fertilisers used by farmers. Wheat prices rose some 68 percent since the start of the year until 8 March before correcting again. Commodity prices remain unpredictable and currently hypervolatile.
Top 5
For this week’s Top 5, Thomas De fauw looks at mutual funds in the Morningstar category Commodities - Broad whose distribution fee-free fund class is available in the Netherlands. These five funds have shown the best performance based on their returns over the last 12 months.
The Morningstar list includes two commodity ETFs. Market Access Rogers International Commodity Index UCITS ETF from FundRock Management is in first place and follows the Rogers International Commodity Index, which offers investors exposure to 38 different exchange-traded commodities via futures contracts. The composition of the index is different from Bloomberg’s, but it is also invested in energy (40.7 percent) metals (24.5 percent) grains (19.6 percent) and so on.
The index was created in the late 1990s and was named after its creator Jim Rogers, the legendary American investor who, together with George Soros, set up the Quantum Fund but who subsequently achieved fame mainly through writing books and TV appearances. In third place is the L&G Longer Dated All Commodities ETF, which tracks the Bloomberg Commodity index described above. The fund was launched in March 2010 and has around 955 million dollars in assets under management.
In second place we find Vontobel Commodity, which is managed by Michel Salden. Before moving to Vontobel in July 2014, he was a portfolio manager at Dutch PGGM Investments. Salden is assisted by Kerstin Hottner, who has been with Vescore, the quantitative investment franchise of Swiss-based Vontobel Asset Management, since 2014. At the end of February 2022, the portfolio distribution was as follows: energy (31.9 percent) grains (30.2 percent) industrial metals (26.5 percent) precious metals (19.7 percent) agricultural commodities (6.1 percent) and livestock (0.4 percent).
Further down the list is DWS Invest Enhanced Commodity Strategy, whose objective is to outperform the BCOM index by adjusting its weighting in various commodities to market conditions. At the end of January 2022, the fund was 39.4 percent invested in energy, 28.8 percent in agricultural commodities, 20.2 percent in industrial, 19.7 percent in precious metals and 5.3 percent in livestock. The fund has been managed by Darwei Kung and Sonali Kapoor from New York since its launch. Kung joined DWS in 2006 and in a previous life was active in the telecoms sector.
This article was originally published in Dutch on InvestmentOfficer.nl.
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