It's not surprising for a dedicated commodity investor to talk up the grains and metals markets, but plenty of people agree with the views of Tetsu Emori, Tokyo-based fund manager for commodity-focused asset manager Astmax.
He argues that 2011 will be a good year for equities, but an even better one for commodities – interesting, since high commodity prices tend to be bad for the stock market overall.
Indeed, an online AsianInvestor poll carried out in early February showed similar support for the asset class. The highest number of respondents (52%) said a basket of commodities will offer the highest returns this year, followed by US equities (39%), Asian currencies (28%), emerging-market bonds (16%), global high-yield bonds (8%) and UK real estate (5%).
Commodity investors will, however, need to stomach higher price volatility than stock buyers, says Emori, who thus recommends a 'buy-and-forget' strategy. Investors seem to be taking note, since the average holding period of commodity investments is getting longer, he adds, and will keep rising this year and even into mid-2012.
Astmax recently launched a commodity long/short strategy seeking a stable return and is preparing a long strategy focusing on emerging markets and a CTA-type systematic strategy, which is under test trading and has resulted in annualised returns of over 30%. Emori believes the market demand for such actively managed products will continue to grow, even in Japan, where investors are not big in commodities.
As for the US's proposed position limits for commodity futures trades under the Dodd-Frank reforms, Emori believes they won't have any negative impact on commodity prices.
“[US president Barack] Obama argues speculation is pushing up prices, but that's not true,” he says. “Even in the US, the CFTC [Commodity Futures Trading Commission] putting caps on positions hasn’t had any effect on future commodity prices, and people can even go to physical markets or ETFs [exchange-traded funds]. There are many places to trade, if they can’t buy futures.”
With regard to specific commodities, Emori suggests that those looking to invest long term should look to “physically tight” markets, such as copper, grains, palladium, rubber and soy beans, all of which can be traded via the futures market.
He notes that China only accounts for 10% of the global demand for oil, but 40% of the global demand for copper. Moreover, copper has the advantage of being backwardated (that is, having its futures price sitting above its spot price) more often, at least on a historical basis, than other commodities. That means the performance of a product that invests in copper futures suffers less from negative roll yield (the cost of rolling over one futures contract to the next month).
And Emori cites the country's fast-growing demand for cars as a reason for a likely continued rise in the rubber price.
Astmax runs six funds, with a total of $300 million in assets under management.