| Investors target commodity derivatives |
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| 04/12/2005 | |
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Of all the investment markets that have benefited from the boom in commodities, derivatives probably stand alone as the winner. Investors have flocked to commodity indices and derivatives to get cheap exposure to an asset that has been providing both performance and diversification over the last five years. "This has become a big size niche market", confirms Lars Hamich, managing director of STOXX LIMITED, the index provider. The size of the commodity index market is estimated anywhere between $30bn and $40bn by Société Générale Corporate and Investment Bank. "There is an increased flow of liquidity into assets tied to commodity", comments Dan Rabb, managing director of US-based AIG Financial Products Corp. "We can confidently state that there is a real market of commodity indexes as an asset class, much in the same way as there is a market for stock, bond, and credit indexes." Apart from the diversification benefit provided by commodities, it is the performance of the asset class which has acted as a magnet for investors. When calculated in euros, the returns of the Dow Jones – AIG Commodity Index over the last five years are 6.47% against 5.03% for the Dow Jones EURO STOXX 50 Return Index. "This difference of returns have opened up the eyes of investors. They realise that it is not only about eventually getting positive returns, but rather a historical trend that demonstrates that commodities follow a different trend from the other asset classes", says Dan Rabb, pointing to the weak correlation of commodities with other assets. Diversity An investor wishing to obtain exposure on various commodities ranging from oil to soybeans can take a position in a future-based index such as the DJ AIG, the Goldman Sachs Commodity Index or the Reuters/Jefferies CRB. Those indices have different sector weighting, which allows to fine tune sector exposures. Other features, such as the volatility of the index, have to be taken into account in the selection process. For instance, the GSCI is twice as volatile as CRB, according to Erb & Harvey and SG CIB. The high liquidity of commodity index assets gives investors much more flexibility. "For instance, the rapid growth of energy prices has pushed some investors to reduce their exposure to this asset class. At the same time, we have seen other investors increase their exposure", says Dan Rabb. "Investors seem to adapt their exposure to the commodity market with much more facility, on the basis of their short- and long-term view on this market." Alternatives Outside the equity realm, there are two other ways to invest in commodities, the choice of which depends on the investor's own objectives. Commodity exposure can be obtained through direct investment in futures or in a fund of futures. While an index provides exposure to a wide variety of commodities, an investor can pinpoint commodities by targeting selected futures. « Right now, the exposure to gold is still obtained through mining stocks. A future fund allows a pure exposure to gold, which is not attainable by equity markets", says Xavier Le Blan, managing director of Prim Investment, a Paris-based fund that has just launched a gold future fund. J.L. |
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