| Passive commodity investment strategies at risk of underperforming |
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| 02/07/2006 | |
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Pension funds should beware of passive commodity investment strategies, just as fund managers are launching brand new products that make it easier to invest in this asset class. According to Andy Green, the European director of investment policy at Mercer, pension funds investing in commodities are likely to lose money if they follow a traditional passive futures approach to commodities, even if prices remain stable. Direct investments into mining or energy companies, which bypass the future market, could prove a more fruitful alternative to gain exposure to commodities. Mr Green says that due to the current position of the future market, investor returns will be lower than the change in spot commodity prices. Such a "contango" phenomenon already occurred in the year to 31 March 2006. Over that period, commodity prices rose significantly, but the return on commodity futures was flat, with commodity futures prices higher than the current spot prices. In a normal situation, the futures prices are usually discounted and lower than the spot prices, which creates a positive "roll" return for pension funds with passive investment in commodities. "If there is an increase in the number of investors seeking to purchase commodity futures, then prices can be pushed up. This could be one of the reasons why markets have fallen into contango", says Mr Green. Mercer says that the market has stayed in contango in the period after 31 March 2006, translating in a drag on the return of the Goldman Sachs Commodities Index at an annualised rate of over 10%. With cash flows into commodity markets remaining high, Mr Green says that there is a risk that commodities futures will stay in contango. "On balance, demand for commodities is likely to remain strong, at least in the short term. But, it is questionable how long prices of both oil and metals, which make up over half of the main commodities index, can persist before supply increases", he says. "The scope for disappointment is high for investors that passively track a commodity futures index. Given current market conditions, passive investment in commodity futures may not be as beneficial as investing directly in energy and mining shares or in actively managed strategies." Last month, Axa Investment Manager teamed up with BNP Paribas to launch a new exchange traded fund (ETF) tracking the Goldman Sachs Non energy Total Return Index, the first instrument of this kind. J.L. |
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