Investment firms team up to offer tactical exposure to energy, metals, and agriculture supercycles
CI Global Asset Management is expanding the range of choice for Canadian investors once more with the introduction of three new ETFs.
Among those is the CI Auspice Broad Commodity ETF (CCOM), Canada’s very first multi-commodity ETF launched in partnership with Auspice Capital.
For Tim Pickering, the founder and CIO of Auspice Capital, it’s been a long time coming. “The demand for commodity-based products on a global basis has been significant for a long time, especially in the last few years since COVID hit and inflation became a very relevant issue,” Pickering told Wealth Professional in an interview. “We think it's far, far overdue that a broad commodity product like this, especially one with a long successful track record, exists for Canadian investors in Canada.”
Commodity ETFs are certainly nothing new in the Canadian ETF space. In 2008, Auspice launched a natural gas ETF in partnership with Som Seif, who at the time was head of Claymore Investments. Since then, other single-commodity products have come out of the woodwork, offering beta-like exposure to resources like oil and gold.
But what’s been lacking until now, according to Pickering, is “an active, thoughtful solution that can be used as a long-term asset allocation. Typical commodity ETFs have high volatility and drawdown and are more suited as trading vehicles than long-term investments.”
“This strategy is intended to allow investors to participate in the multi-commodity space through the convenience of an ETF. And in an inherently volatile commodities market, the strategy combines tactical commodity exposure with capital preservation,” says Nirujan Kanagasingam, VP and head of ETF Strategy at CI Global Asset Management. “The ETF’s underlying index also has a long-proven track record of providing superior returns with lower volatility than major commodity indices.”
As Pickering explains, CCOM gives exposure to up to 12 commodities that fall under three main categories: energy, metal, and agriculture. The strategy, which has gained favour among retail and institutional investors since its inception in 2010, is designed with risk management in mind.
“We all want commodity upside, but commodities are volatile, and they will correct,” he says. “Whether an investor has a view for the commodity supercycle, they have an overall fundamental view, they're worried about inflation, or they’re looking for a hedge … this strategy essentially seeks to capture those upward trends in commodities and provide meaningful diversification in investor portfolios.”
As an active mandate with elements of trend-following, the strategy may have long exposure to a given commodity when the market is going up, or sit on the sidelines in cash. Designed with risk management in mind, it also tempers the normally wild behaviour of commodities into a volatility profile that’s palatable for the majority of investors.
“We get those commodity exposures using futures contracts, because they’re very liquid. It’s easy to get in when markets are moving higher, and take that risk off and preserve capital when the pendulum swings,” Pickering says. “Some other so-called commodity products in Canada invest in the producers or extractors of these resource. We’re only interested in exposure to the price movements of the underlying commodity, not resource equity.”
Looking at the energy and metal sectors of the commodity complex, Pickering argues that the rise of stakeholder capitalism, decarbonisation, and ESG will generally put pressure on the supply of commodities, driving up prices of those commodities and ultimately leading to supply-side inflation.
“Seasonal capex has been in decline in in both the mining sector and the oil and gas sectors since about 2012, so over 10 years,” he says. “If we’re going to build back better and spend money to incentivize the system, we need these products to build infrastructure or pursue a green transition. That creates more price pressures, because you can’t just build and turn on new mines and oil rigs on a dime … that takes time, I’d say seven years on average.”
As for the agricultural piece, Pickering points to the continued growth of the global population, stirring up a tsunami of demand for crops and foodstuffs. The Russia-Ukraine conflict has only added fuel to the fire, as both countries are prominent producers of agricultural products.
“There’s really two basic ingredients required for a commodity supercycle: an extended period of underinvestment in supply, and some sort of generational shock. We believe we have both of those things today,” Pickering says. “The setup is there … but that doesn’t mean things will play out that way. So even though this is a strong long-term trend, you’ll have volatility, with big moves up and massive corrections, which is where a tactical risk discipline strategy like ours comes into play.”