Commodity trackers flee for surging stocks

December 4, 2013 8:59 am

Commodity trackers flee for surging stocks

By Gregory Meyer in New York

Index-tracking commodity investors are fleeing the strategy at a record pace as surging stock markets leave raw materials in the dust. New estimates from Citi show $36bn was redeemed from passive commodities investments in the year to November, a “massive retrenchment” from net inflows of $27.5bn in all of 2012.While gold exchange traded funds suffered the worst, the bleeding has been widespread. Commodity assets under management amounted to about $273bn as of October, down from an April 2011 peak of $380bn when oil prices surged during the Libyan civil war, Citi said.

Commodity indices such as the S&P GSCI and Dow Jones-UBS became popular in the last decade as a relatively simple way to diversify portfolios, bet on global growth and hedge against inflation. The influence of index investors drew scrutiny as commodity markets spiked in 2008, with one US regulator calling them“massive passives.”

The S&P GSCI and Dow Jones-UBS are respectively down 2.6 per cent and down 10.6 per cent on a total return basis in 2013. Developments including the shale oil boom, record grain harvests and new copper mine projects have softened commodity prices.

“If you were in a passive index this year you got crushed,” said Aakash Doshi, commodities strategist at Citi. He said that when passive commodities investments last had annual outflows in 2011 they totalled about $13bn. The figures include indices and ETFs.

The drawbacks of basic commodity index strategies are well documented. They include “roll costs,” or the premium paid to replace expiring commodity contracts when futures curves slope upward. Barclays called the outlook for passive commodity returns “modest at best” in a note last month.

Fund managers have developed “second generation” indices to skirt these problems, but Mr Doshi said the passive index flows reflected a broader trend. “I think it’s more of an outflow from the asset class, with some of the money rolling into equities or staying on the sidelines,” he said. The S&P 500 stock index is up 26 per cent this year.

The biggest outflows by far have been from precious metals funds as gold prices head for their first annual fall in 13 years. But investors are also starting to exit broader index products. The number of shares outstanding in the $6bn PowerShares DB Commodity Index Tracking Fund have declined by 8 per cent in the past three months – a sign of redemptions.

The commodity desks of some Wall Street banks, which sell index swap products to institutional investors, have been pressured by greater capital requirements and the looming “Volcker rule” ban on proprietary trading.

“An additional factor hitting the swaps market is that the banks are pulling out,” said Douglas Hepworth, executive vice-president at Gresham Investment Management, a $15bn commodities fund group in New York.

However, other banks and asset managers have moved in. RBC Capital Markets, a unit of Royal Bank of Canada, entered the commodity index business in September.

“We have seen significant interest from our institutional clients about us entering the commodity index space as they look to partner with a large, strong and stable bank,” RBC said at the time.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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