Investors still want commodities, despite the slowdown of the so-called “Supercycle” that has dominated the last couple of decades. But they are looking for new ways to access the asset class, no longer satisfied with pure beta play.
The latest Barclays Capital's annual survey of institutional investors revealed plans to significantly increase their commodity investments this year.
Of the survey participants, 56% said they will initiate or increase their exposure to the asset class this year, compared to 45% last year. The proportion planning to decrease their exposure, on the other hand, halved from last year to 7% of respondents.
However, delegates at this month's S&P Dow Jones Commodities Seminar agree investors are looking for new types of exposure to the asset class, as returns and cross-correlations have disappointed.
Kevin Norrish, head of EMEA and Asian commodities research at Barclays, explained most investors are looking for commodities as a diversifier. The high correlations of assets within the asset class are raising questions about its diversification benefits.
Since the 2008 global crisis, most of the money going into commodity funds has been flowing into gold and precious metals. Since then, assets under management doubled to 30% and demand for precious metals continued increasing.
Key drivers for this demand recently have been the announcement made by Europe's Central Bank and the initiation of QE3 by the US Federal Reserve, both aggressive measures aimed at boosting growth.
Promises to "do whatever it takes" to keep the Euro afloat, made by ECB's president Mario Draghi, have put upward pressure on inflation.
As a result, investors are increasingly looking for inflation protection. Gold is a natural hedge against inflation, since its price will grow as inflation increases, so demand for gold is likely to surge, experts think.
Their preferred vehicle to gain exposure to the asset are exchange traded products, which have enjoyed superior demand over index funds, especially when it comes to precious metals.
Today on Investment Europe
Selectors are increasingly being asked to consider the merits of ‘smart beta’ on behalf of their clients, but opinion on its role in providing superior risk adjusted returns is not clear cut.
A selection of key moments caught on camera from InvestmentEurope's recent Fund Selector Bond Focus Italy, which took place in Milan on 4 March.
Helene Williamson, head of Emerging Market Debt at First State Investments, is set to contribute to the discussion at the upcoming Fund Selector Forum Sweden in Stockholm on 7 May.