Higher inflation and a low in the economic cycle make the case for diversification
Investors have grown frustrated with commodities in 2018 as the broad commodity benchmarks have stalled. But according to investment experts, that’s no reason to throw the sector out of investment portfolios altogether.
“Commodities have been on a positive track since 2016,” said Tim Pickering, founder, president and CIO of Auspice Capital, during a webinar held by US-based Direxion, reported ThinkAdvisor. “There’s diversity in commodity sectors, and there are opportunities if you’re tactical.”
Pickering noted that there’s strong demand agriculture and metals, but political wrangling and threats of tariffs have “affected metals and grains specifically.” But as these commodity sectors expect lows because of these events, it may be time for investors to make some opportunistic investments.
“[There is] huge global demand with protein meats,” Pickering said. He also noted that specific commodities are bucking downward trends in the commodity subsectors they belong to, like wheat in grains or cotton in softs. Crude oil prices have also been climbing, with WTI futures contract close to US$70 per barrel.
Demand is exceeding supply for many commodities, according to Pickering and his co-presenter, Edward Egilinsky, managing director and head of alternative investments for Direxion. The trend should continue, they added, due to sustained population growth in developing countries and the apparent near-low in the economic cycle for commodities.
“Commodity cycles run about 10 years,” Pickering said. “We believe we’re at the start of the cycle … strong demand, equity market level and a strong dollar [are also factors]. It’s a very exciting time for commodities if you go about [investing] in a tactical way.”
Commodities should comprise five to 10 per cent of a portfolio, he said, citing the asset class’s low correlation to equities and fixed income, as well as the fact that they’re a good inflation hedge and are able to generate alpha. But simply relying on gold exposure to hedge against inflation is “a mistake,” he added.
“It’s the same as having only energy [in a portfolio],” Pickering said. “Too much concentration doesn’t make sense.”
Excessive concentration is just one of several problems that long-only commodity index funds suffer from, according to Auspice. In a study of such long-only funds, the firm found that their index-based methodology offered no ability to hedge during drawdowns. In addition, their annual timetable for index rebalancing left them unable to adapt to quickly changing price trends.
Pickering also noted that a lot of money has been “pumped into the stock market,” and he sees institutional investors looking elsewhere. “[W]e’re being given a window right now where commodities should be considered,” he said.