Veritas – blogging the Alpha Generators in Helsinki

Investment Europe’s Jonathan Boyd is blogging from the Alpha Generators manager roadshow today in Helsinki. We present to you the thoughts, outlooks and cautionary notes from the speakers.

Today’s manager speakers are:

David Donora on commodities, from Threadneedle

James Wilkinson on real estate securities, from Thames River Capital

Claire Marwick on Japanese equities, from Martin Currie

Chris Bullock on European corporate bonds, from Henderson Global Investors

 

Today’s first session involved presentations from David Donora, James Wilkinson and Claire Marwick.

Commodities have their role, said Donora, but it is not just about playing the asset through futures, which forces investors to roll these over or take delivery of the actual commodity.

Investors also need to be aware of a changing situation. For example, West Texas Intermediate, which is effectively not used outside US, is now priced very differently to Brent crude. Historically, the two were highly correlated in price, but now investors could choose to follow Brent alone and “throw WTI out the window”.

Remaining wedded to indices is challenging in other ways too; consider the rapidity of political and other changes in the Middle East this year, Donora said.

And while only a small part of the commodities market is in active management, more is heading that way, he believes.

Donora describes his investment process as starting from the top down. Then it looks at bottom up fundamentals across a universe including both S&P GSCI and DJUBS index components. The number of underlying commodities that make up the universe is actually fairly limited, he said.

Active investors do, however, need to be in mind of the degree to which they need to drill down into relevant information.  An example of the details required is in following Chicago Wheat versus Minneapolis Wheat versus Kansas Wheat. As an active manager Donora says he can play the protein differences in the wheat types that make up these different markets.

Another example is understanding demand elasticity in the oil market. Identifying the main geopolitical threat currently as the spat between Saudi Arabia and Iran, Donora said that oil could jump to $200bbl overnight off that threat. Meanwhile, the global margin for additional output is limited, because the existing price of oil is already so high that anybody who can is extracting oil.

And yet another example is US natural gas, trading at half or a third of the global market price. This is shale gas, which has limited export capabilities. The local market is subject to factors such as payback on a shale gas well being less than 60 days even at that lower price. There are 100 years of proven shale gas supplies in US, he says.

In his outlook, Donora outlined a number of headwinds: China is focused on cutting inflation, which implies lower growth and demand for commodities, while both the US and Europe are struggling with stagnation.

However, compared to 2008, there are differences. Inventories are low, and demand is still relatively constant. And then there are sectors such as agriculture, which is described as an easy story to understand, with an additional 100 million mouths to feed annually.

The dynamics of global commodity markets are also changing, with the US and Europe already representing less than half of global GDP, and the balance tipping towards faster growing emerging markets.

 

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