| Pooled Commodities Fund 101 |
|
|
| 12/09/2004 | |
|
Marko van Bergen, Head of Benelux Business at Barclays Global Investors, answers this week's 101 on pooled commodities funds 1-What is a pooled commodities fund? A pooled fund that comprises a basket of futures that tracks the Goldman Sachs International Commodities Index, the most widely used among commodities index by institutional investors, allows investors to buy in the fund like they would buy in any other fund. This type of fund invests in commodity futures, giving you exposure to the asset class without actually owning it. Derivatives vehicle, if they are conveniently rolled through the next period by the fund manager, avoid the investor to have to buy the commodity at settlement, be it oil, wheat or coffee. Such a fund also centralises all investment in commodities, so that the investor ends up with only one line in his accounts, which gives you a clear and simple overview of the holdings of the fund. With regard to performance measurement, commodity returns from a collateralised, diversified investment can be derived from three sources, which are the spot return, the roll return and the cash collateral return generated by the derivative instrument. 2-Which type of institutional investor usually buys in this type of fund? With regard to the commodity factor, while institutional investors can invest in this asset class by trading directly themselves, only a handful of large institutional investors with enough in-house expertise can actually do it well. Also, gaining access to commodities through the derivative markets, for instance swap notes provided by a broker or a bank, is a very cumbersome task due to the specialist skills required to understand those products. Managing a portfolio of commodity derivatives across various sectors is a complex and time-consuming process, and the regular rolling of futures contracts results in significant transaction costs. Matching the index returns and the absorption of the impact of rolling costs require specialist skills in capturing additional returns so that a commodity investment be a worthwhile one. This is one of the reasons why a majority of institutional investors have no allocation, or only marginal allocation, to commodities at this particular moment. 3-What are its main advantages and shortcomings for an institutional investor? In general, pooled funds are more efficient than segregated portfolios due to simplified administration and the economies of scale associated with the assets under management within the fund. A pooled fund comprises a variety of investors with diverse requirements. This increases opportunities for crossing at the unit level, from which investors may extract significant transaction cost savings. Scale in the fund provides liquidity, making withdrawals simpler and generally much cheaper. The existence of large, well-established pooled funds is required to provide clients with these benefits. It also improves the opportunities to meet performance targets, be it because the size enables full replication or innovative investment strategies. Finally, scale in trading – by trading for one mutual account, the trades are generally larger and more diverse, and allow more flexibility and crafting to extract price opportunities and lower commission rates. The related clearing and settlement costs will also benefit from the lower costs of one account. From an investment manager's perspective, the level of administration (bespoke reporting, etc.) is generally higher in a segregated portfolio than a pooled fund. Other things being equal, this will be reflected in higher management fees for a segregated portfolio. From a safekeeping and administration costs perspective, one pooled fund will generally be less costly than the aggregated total for a multitude of accounts. By pooling their common investment holdings, all unit holders can share in the benefit derived from this saving. From a client, trustee board and custodian perspective, the investor will hold units in one fund only, allowing simplified and easier administration compared to the complexities involved with a multitude of holdings (reconciliation, etc). Interview by J.L. |
|
Articles of the same Serie : 101 |
|
© Copyright 2008 bfinance. This document is for your personal non-commercial use. Any further copying, reproduction, distribution is strictly prohibited. To obtain permission please contact This e-mail address is being protected from spam bots, you need JavaScript enabled to view it