By Jade Fu, Investment Manager at Heartwood Investment Management
Across our multi-asset class portfolios, we have not held any direct commodity exposure for more than two years. That turned out to be a good decision, given the huge collapse in the oil price and steep declines in other parts of the commodity complex over the last few months.
We continue to believe that the fundamentals remain weak for the commodities asset class, principally due to the supply and demand imbalance. Global demand for commodities has been growing but at a slower pace due to the slowdown in emerging markets. Meanwhile, supply for various commodities has grown faster, helped by the shale gas revolution, favourable weather for crop productions, and higher metals outputs in the US and China.
That being said, we are beginning to see tentative signs of stabilisation across a number of sectors, particularly in energy, and we consider that now is the time to gain an entry point into the asset class.
First, commodity prices across the complex have moved a long way and are trading at the lower end of their five-year ranges. Second, significant price falls have started to attract more investor interest into the asset class this year. Inflows are totalling almost $5 billion, in sharp contrast with the large outflows reported in each of the last two years. 1
Finally, within a multi-asset class portfolio, investing in the commodities asset class remains a tool for portfolio diversification. Correlations with equities and fixed income have been trending higher in recent years, but since the middle of last year, these correlations are breaking down and provide the potential for a more diverse return stream.
Consequently, we have decided to invest in a broad based instrument, the UBS CMCI Composite Commodity ETF. Going from holding no exposure, we have no plans to maintain a full weight in commodities and intend to remain underweight in the asset class. However, we are in a position to phase back into the asset class should the fundamentals become more supportive