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.
Derek Pain: I'm cautious, but remain one of the few bulls in the market
Donald MacInnes: Who would want to be a Barbie girl in a non-Barbie world?
Mark Dampier: How to get an income now that savings are past the 'use by' date
Thousands of UK investors could lose out following collapse of Secured Energy Bonds
Bargain Hunter: Fly off for a winter break in France or Portugal for well under £100
- 1 Venezuela Expo Tattoo 2015: Extreme body art from 'Vampire Woman' to 109mm earlobes
- 2 Saudi preacher who 'raped and tortured' his five -year-old daughter to death is released after paying 'blood money'
- 3 Ball pool for adults opens in London
- 4 Game of Thrones season 5 trailer: The first full-length look is here
- 5 Rashida Jones speaks out against male-centric porn saying 'women should have sex and feel good about it'
9 reasons Greece's experiment with the radical left is doomed to failure
Have we reached 'peak food'? Shortages loom as global production rates slow
Greece elections: Syriza and EU on collision course after election win for left-wing party
British grandmother Lindsay Sandiford faces execution by firing squad in Indonesia
Liberal Democrat minister defends comments suggesting immigration causes pub closures
King Abdullah dead: We can't afford not to hold Saudi Arabia's royals to account
iJobs Money & Business
£40000 - £50000 per annum: Recruitment Genius: This is an exciting opportunity...
£30000 - £35000 per annum + Benefits: Ashdown Group: Marketing Manager - Marke...
£13000 per annum: Recruitment Genius: This Pension Specialist was established ...
£23000 - £26000 per annum + Benefits: Ashdown Group: Market Research Executive...
Day In a Page
A minimnalist four-bedroom home designed to the highest spec, featuring glass walls and a kitchen space lit by a glass roof
Hibernate during winter and make your living during the summer at this busy guesthouse with panoramic sea views, in the village of Lynton
A four-bedroom penthouse next to the Tate with direct views of St Paul's from two floors of luxurious living space
A four-bedroom detached home surrounded by spacious gardens and woodland, close to New Pudsey
An 18th-century, three-bedroom home near Langstone Harbour built from ships beams with vaulted ceilings and wood burning stoves
A five-bedroom semi-detached home with a mix of period and modern features in a popular and convenient location
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
A three-bedroom villa with self-contained flat, minutes from Lake Windermere
A deceptively spacious, beautifully presented Georgian home with 3000sq ft of living space and five reception rooms
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
A three-bedroom, 15th-century cottage with original features in the picturesque village of Sissinghurst
A six-bedroom terraced house with large south-facing roof terrace, cinema room and wine cellar
A new seven-bedroom home built in Queen Anne-style with swimming pool and parkland views in Mortimer
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion