Individual Commodities Diverge Widely

Chidem Kurdas

Barclays Capital finds that investors are increasingly moving to differentiated commodity strategies, away from the broad-based index exposures that many previously favored. The outlook is greater diversity between markets, says Kevin Norrish of Barclays Capital.

For the next quarter, the bank’s research team recommends going long commodities in general as well as stocks and credit. Do not expect that this bullish “reflation trade” will persist through 2011, says Larry Kantor, head of research. However, a survey of investors indicates that they look to increase over time the share of commodities in their overall portfolio.

Most survey respondents believe commodities should account for 6% to 10% of a diversified portfolio. By contrast, many institutions have only around 2% currently. People are looking at commodity exposure as a long-term commitment, said Mr. Norrish.

This means the $340 billion in commodity assets estimated by Barclays Capital, up from $270 billion at the end of 2009, will continue to grow at a fast clip. Individual commodity markets vary sharply in size as well as other characteristics, hence they respond differently to money inflows.

The corn market, for instance, is much smaller than the crude oil market, so investment flows have different effects, Mr. Norrish says. The market cap of just one oil company, Exxon Mobil, dwarfs the total capital invested in all commodities.

Returns on commodities spanned a wide range this year. Palladium, a very small market, rose 84% year-to-date, attracting investors that include hedge funds. Meanwhile US natural gas fell by 19%.

Hedge funds have been going for less-known products. George Soros is among the managers that bought the stock of Platinum Group, part owner of Bushveld Igneous Complex of South Africa, which reportedly holds most of the world’s new platinum and palladium.

Barclays Capital’s analysis suggests variations will persist or even widen. The question for investors is no longer whether to go for commodities but rather which markets to be in and what strategies to pursue.


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