Investing In Commodities

Selectors view: how to play the commodity market

The commodity sector is a thriving market with many fund managers claiming to have the best strategy. We asked a number of fund selectors what they believe to be the best strategies currently on offer.

Christian Lundström, Independent Investment Group

Commodities have been a great investment in recent years and I have had exposure in commodity futures as well as in commodity related stocks, both as strategic and tactic asset allocation. I have been involved in every type of commodity; precious metals, industrial metals, energy and agriculture. In my long only equity mandate I have been 10 % - 40 % allocated into commodity futures and / or commodity related stocks since 2009. In my CTA / absolute return mandate I have been as much as 65 % allocated into commodity futures. I think that shows my conviction for this great asset class.

I believe commodities have further to go as we current are in an inflation scenario which is not likely to go away any time soon given the recent QE stimulus. Still, even if market turns down I believe a broad commodity futures basket will perform relatively better than most equity indices. The long run Commodity / Stock Ratio has been trending upwards favoring commodities relative to stocks since 2000 when this inflationary environment started and the trend is not broken yet.   

I play commodities via ETCs, ETFs, futures and mutual funds. ETF Securities and Source provide good ETFs and ETCs, and UBS RICI funds (tracking Jim Rogers commodity index), Vontobel Belvista Commodity fund and Schroder Alt Sol Commodities provide great commodity basket funds. To avoid the contango effect and to increase beta I also use commodity related stock funds; I am or have been invested in Baring Global Resources , JP Morgan Global Natural Resources and Blackrock World Gold .

Santiago Pons, Capital Value

To take advantage of this situation we have been recommending two different approaches. First, using mutual funds and ETF that are specialized in commodities, whether they do it directly (Market Vector Rare Earths ETF, DB Platinum Commodity ) or throughout companies from the sector (Craton Capital Precious Metals Fund, BGF World Energy ).

Second, by buying mutual funds and stocks from companies that take advantage of the rise of consumption in Asia and Latin America that we mentioned before. (Nordea Emerging Consumer, Yum Brands).

Investing in Market Commodities

There are three kinds of trading investments, which are stocks, currency, and future commodities. The commodity market is where people all over the world can invest in a number of primary products. Examples of commodities are soybeans, wheat, corn, oats, sugar, rice, cattle, pigs, precious metals, industrial metals, and even electricity.

Farmers themselves supply a great number of the offerings. Of course crises, like drought, drive prices up to offset low output. This is where commodities contracts come in and actually help the farmers.

Goods, whether products or services, that can be exchanged for other goods are commodities. This kind of trade can be found in several locations. There are the New York's Mercantile Exchange, Japan's Tokyo Commodity Exchange, and India's Multi Commodity Exchange.

Through these venues, producers and middlemen from around the world trade commodities. Though they concretize the global division of labor, they are legal exchanges. The process of exchange is orderly and consistent as well.

Market commodities, like stocks and currencies, are subject to trends. Traders use their knowledge of these trends to gain profits in this industry. Trend reading is a necessity for traders who want to survive the rollercoaster of consumer trends.

The market loves future commodities, and it is a good opportunity for investors. This is because there is money to be made from regional and national market commodities. In these cases, physical transactions usually take place between buyers and sellers.

There are times when derivatives transactions take place in the commodity market. In this case, what people deal with are highly leveraged financial products. The potential dividends are so great that they can be sold as actual commodity contracts.

Banks may participate in transactions. Banks have increasingly become more involved, up to thirty percent growth each year. Commitments for global commodities has reached ten trillion dollars.

The wise investor gets to know the trade first, from the commodities to the markets. For example, he must know what in-the-money, at-the-money, and out-of-the-money mean. Assessing the worth of a contract is also a signficant skill.

Investor education is a prerequisite for all those looking to participate in market commodity trade. There are a lot of agencies that provide tutoring for such.

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Investing in commodities, a seminar at the London International Press Centre February 2, 1978