For illiquidity-adverse investors searching for yield in the real asset space, commodities are looking increasingly attractive, says Jodie Gunzberg, global head of commodities at S&P Dow Jones Indices.
That’s especially true for investors who can’t take on the risk associated with private deals, property or infrastructure, and are looking for equity alternatives but with similar liquidity, she argued at AsianInvestor’s ninth Asian Investment Summit last week.
But some investors prefer to stick to private assets. "As soon as something moves out of the private equity space into the listed sector, it evolves into a different kind of animal – that’s why we don’t include listed assets in our real asset institutional landscape,” said Simon Hopkins, chief executive at London-headquartered fund house Milltrust, on the same panel.
Nonetheless, despite talk of the commodities 'super-cycle' waning, the asset class offers diversification, inflation protection and liquidity with an equity-like risk/return profile, said Gunzberg (pictured right).
Though some investors have cited volatility as an issue, the historical volatility of commodities is some 19%, not a great deal higher than equities’ 15%, and the respective historical returns are 8% and 6.9%, she added.
Commodities and equities moved down together on four occasions since the 1970s and the asset class has a correlation of about 0.18 to stocks and –0.02 to bonds, she adds.
In the early 2000s, commodity prices were high and suppliers rushed to mine, grow and drill. From 2005 inventories grew very large. In the wake of the financial crisis in 2008, demand dropped off and suppliers stopped supplying. As of 2012-13, inventories had been depleted, and now a number of commodities, including crude oil, are at critical levels.
Hence supply shocks are now having far bigger impact on commodity prices than a few years back, adds Gunzberg. "That’s much more powerful than any possible slowdown in Chinese demand growth."
China is now the world’s biggest importer of soya beans, sorghum, canola and palm oil. Five years ago it didn’t import any beef; last year it imported 500,000 tonnes.
“So the demand for agricultural commodities, from China and other developing countries, has really altered the favourable tailwind that drives the thesis for owning agricultural assets,” says Milltrust's Hopkins.
A drought in Brazil at the start of 2014 killed off its coffee crop, and Indonesia slapped a ban on nickel exports in January. Also, China is possibly stockpiling oil, which is supporting prices, Gunzberg says. Meanwhile, extreme weather in the US this winter destroyed some of the country’s agriculture and livestock supply chain.
“Those factors don’t drive equities like they drive commodities, so there’s the diversification," she adds. "Historically, for every 1% rise in CPI there’s been a 14% rise in commodities. You can benefit without giving up liquidity."
Fewer than 10% of institutions that allocate to commodities seek direct physical exposure, because of the liquidity risk, says Gunzberg.
“There isn’t a generally accepted definition of what the term real assets means. For commodities there is the futures market, which is direct exposure in the sense that the prices of contracts are based directly on the spot price by the theory of storage equation,” she adds.
However, diversification can only go so far.
“There’s a place for commodities in portfolios, whether directly, or through a vehicle, or our listed equity managers,” says Sam Sicilia, chief investment officer at Melbourne-based superannuation fund HostPlus. Once a portfolio is diversified, further diversification doesn’t necessarily have a material impact, he added, speaking on the same panel.
In Asia, commodities are more aggressively sought in Korea, Taiwan and Singapore, less so in China. Japan’s risk appetite remains subdued, says Gunzberg.