Commodities promise an interesting ride for investors
Simon Read asks whether Glencore’s IPO is a positive sign to invest or a warning
Saturday 07 May 2011
Commodities trading giant Glencore announced details of its flotation this week. The IPO on 24 May will value the company at around £36bn and give the firm cash to spend on growing, with some analysts already picking out the London-listed minerXstrata as its first target. Shares in Glencore are likely to be oversubscribed, but the timing of the offering is interesting. Some critics suggest there could be a commodities crash in the offing, and that Glencore's bosses – including chief executive Ivan Glasenberg, whose stake in the firm will be worth around £5.8bn, are cashing in at the top of the market.
In other words, does Glencore's intention to go public signal that investors should starting moving their cash out of commodities into safer homes? That appears to be the message from Jeremy Grantham, mega-fund manager of GMO, who has built a reputation over the years of correctly identifying market bubbles. Last month he turned his gaze on commodities and wrote: "Time to wake up: days of abundant resources and falling prices are over forever."
His argument is that the world is now using up its raw material at an alarming rate, and the clear indicator of this is prices. He pointed out that 100 years of decline in commodity prices have been reversed in just the last eight years. "This cannot continue," he warned. So does that mean a crash is close? Grantham suggests so. He predicts a series of events that would "break the commodity markets en masse", leaving the situation "not unlike the financial collapse".
Frightening stuff. But as markets crash, that creates opportunities, says Brian Dennehy of the advisers Dennehy, Weller & Co. "There are good reasons to expect prices to come under sharp pressure in the shorter term, and it is obviously better to buy when stuff is cheap."
The decision of whether to invest or not depends on your existing portfolio and how you feel now, says Dennehy. "Suppose you are a long-term investor, say five years in key funds," he says. "Are you happy to ride out turbulence? Or would you prefer to take some profits?"
He says it is psychologically more difficult for a more recent investor. "For example, if you invested in JPM Blackrock Commodities in December, you are losing money. Are you really a long-term investor, or were you hoping for big headline gains? If you were punting, step to one side."
Even without a potential crash, investors should be wary of the sector, cautions Adrian Lowock of Bestinvest. "Commodities have had a strong run since the financial crisis. Initially gold was one of the more popular commodities as investors sought a real return in an uncertain world, but over the last year it's performance has lagged behind silver."
Yet the price of silver has slipped this week. "That highlights the volatile nature of commodities," says Lowock. "They can provide strong positive growth, but equally investors can get stung by sharp falls. Considering how far commodities prices have rebounded there is little doubt that the easy money has been made."
Rebecca O'Keeffe of Interactive Investor is also cautious. "Gold and silver prices remain at extraordinary levels. My belief is that they are being artificially inflated by low interest rates and high powered money from quantitative easing and trade surpluses in the developing world. When US monetary conditions start to return to normal then precious metal prices could fall sharply. More generally, commodity prices could well ease back and investors might well be advised to diversify."
It's true that commodities have attracted a lot of speculative money recently which has led to some, such as silver and cotton, to display large moves. For that reason Steve Gibson, portfolio manager at Fidelity International's Select List, favours actively managed commodities rather than indexed funds. "Specialist commodity managers, like Diapason Commodities Management and the Tiberius Group, are able to avoid many of the pitfalls of passive commodity investment and invest where they see value on a long only and long-short basis," he says.
Fabio Cortes of Oakley Alternative Investment Management agrees that active management is preferable when it comes to commodities. "It's tricky for passive investors to make a call on commodity markets because they really require close monitoring, the insight to know when to close positions as well as a plethora of other factors such as hedging for currency movement and the choice of the appropriate instrument."
Which funds look attractive to the experts? Brian Dennehy says: "I would like to be drip-feeding into the JPM Blackrock Commodities fund right now, along with M&G Global Basics. It's an each-way bet for a long-term investor, without the risk of undue pain in the short term."
Adrian Lowcock tips the Investec Enhanced Natural Resources fund. "Its managers can benefit from falling as well as rising prices. This would help reduce the risks, while still benefiting from exposure to what remains an interesting sector."
A Commodities trader
* Glencore is possibly the biggest company you’ve never heard of. It was formed 37 years ago and is now the world’s largest commodities trader. It employs around 57,500 people in more than 40 countries across the world, trading in commodities such as coal, oil, metals and minerals as well as agricultural products and energy.
It has been one of the biggest beneficiaries of the recent growth in demand for commodities, especially from China, as it emerges as the world’s second-largest economy. With China’s expansion set to continue its demand for commodities will grow, boosting profits for the likes of Glencore. But the Swiss firm has come under much criticism for its secrecy. Until now, it has been entirely owned by its employees, but the flotation later this month will mean being more accountable about its practices. The IPO will make paper billionaires of five Glencore executives, including chief executive Ivan Glasenberg, a former coal trader (pictured left) who owns 15.8 per cent of the company. He will end up sitting on a fortune of £5.8bn.
Daniel Badenes and Aristotelis Mistakidis, heads of zinc, copper and lead at the company, will be worth £2.2bn while Tor Peterson, who runs the coal and coke department, will be slightly less wealthy at £1.9bn. Glencore’s oil boss Alex Beard will also become a billionaire, with a £1.7bn stake in the company.
They all have “lock-in” agreements that prevents them cashing-in on their shares immediately, but commentators will be watching their moves closely.
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