Commodities are going back to fundamentals, says Harcourt’s Jeremy Baker

Jeremy Baker, executive director of commodity investments at Harcourt, sees change taking place as commodities are once again priced on fundamentals.

Harcourt is part of the Swiss financial services group Vontobel, which acquired the alternative investments focused business in 2007.

Since then, Harcourt has been offering investors two funds on behalf of Vontobel: the Belvista Commodity fund; and, since 2012, the Belvista Dynamic Commodity fund. Both use the Dow Jones UBS Commodity TR Index  (DJ-UBSCI) as a benchmark and aim to be overweight or underweight individual constituent commodities.

However, while the Belvista fund selects optimum contract maturity only, the Dynamic fund also pursues other commodity investment strategies.

Jeremy Baker, Harcourt’s executive director of commodity investments, has been managing the two funds and has a firm view of how the scenario is changing for this asset class.

“Both are long-only, fundamentally orientated funds and seek to generate Alpha through underweight and overweight dynamics,” he says. “Our entire investment strategy is fundamentally orientated towards the range of 32 commodities we invest in. We have developed a conviction scoring model which is split up into fundamentals and macro-economic criteria. We then look at a range of 67 inventories and set a time horizon of either one, three or 12 months.”

Certain commodities, such as gold and other precious metals, are more subject to macroeconomic factors than to fundamental analysis, Baker adds.

“The technical factors we normally look at in our fundamental analysis are CFTC factors; positioning on the market in order to avoid crowded trading; stop-loss procedures as well as entry and exit points. 60-70% of our process is fundamentally driven.”

As Baker also says, Harcourt has noticed a shift back to fundamentals lately, following a period in which the commodity market has been heavily macro-orientated.

“It is a relief for us, after commodity investments have been driven by factors
such as the tapering/no tapering debate. We said earlier this year that the Fed would not taper and we had a downside projection on gold that actually panned out in the end,” he says.

Looking forward, Baker still does not expect tapering to take place anytime sooner than 2014. “I do not think the Fed will be tapering. The whole issue will be handed to Janet Yellen, who is likely to continue to work in line with the Fed’s previous directives on the issue.”

Commodities range

Harcourt’s current investments across a range of 32 commodities includes crude oil, natural gas, gold, silver, platinum, copper, nickel, aluminium, soy beans, and grain. The funds are distributed primarily across Germany, Scandinavia, Spain and Italy.

“Together with Vontobel, we are trying to penetrate the UK market too, but it is taking time,” he says.

Asked about the current benefits of investing in the asset class, Baker says: “Our client base is primarily institutional, therefore our clients invest with a three to five year time horizon in mind. An issue that is definitely central in our clients’ thoughts is how inflation and the Chinese market’s evolution will impact commodities going forward.”

With an eye to inflation, Baker recommends investors maintain a broad commodity exposure together with an active strategy. When it arrives “inflation
is going to be sharp”.

“Our clients are taking an inflation hedging perspective. Traditionally, commodities have appeared as insurance policies against inflation, and it is true that investing in them is positive for investors particularly when inflation comes unexpectedly.” While there is no particular preference in the type of commodity that he will invest in, Bakers notes that he feels quite positive about global manufacturing and its impact on demand.

“The present scenario is quite complicated. We have the shutdown in the US; the tapering versus non tapering uncertainties; there is concern about the sustainability of western economies, as well as about China. Most of our clients are underweight. However, we see an improvement in global manufacturing, especially in the UK.”

For 2014, Baker sees potential for industrial commodities in general, as well as for grain and soy beans. However, the market awaits further signals.

“For China watchers, for instance, the third plenary meeting and the reforms that come out of it will be decisive. I believe the entire market is wondering ‘where do we go from here?’ and the situation will be clearer from March/April next year,” he concludes.


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