Don't miss out on the commodities boom

Oil, gas and gold are star performers outshining shares and bonds, says David Prosser

Forget shares and bonds. The smart money has been in commodities over the past year. While a modest recovery on the stock market is continuing, with the FTSE 100 Index of leading shares up about 14 per cent on 12 months ago, the oil price is now 43 per cent higher than it was at this time last year.

Forget shares and bonds. The smart money has been in commodities over the past year. While a modest recovery on the stock market is continuing, with the FTSE 100 Index of leading shares up about 14 per cent on 12 months ago, the oil price is now 43 per cent higher than it was at this time last year.

There is no immediate sign of a slowdown. On Tuesday, the US government said the price of oil was likely to hit all-time highs this year of about $50 a barrel. Other commodities are doing well, too: thanks to surging copper and aluminium prices, the Reuters CRB Commodity Index hit a 21-year high last week.

Most investors have missed out on these gains. Although the influential Barclays Capital Equity Gilt Study, published last month, recommended that any balanced portfolio should be 5 per cent invested in commodities, the majority of private investors have no exposure to the market.

The commodities sector is diverse. It spans fuels such as oil and gas, precious and base metals, and a range of soft commodities, including everything from sugar to orange juice. In practice, all but the most specialist investors avoid the latter, preferring investments in energy and metal.

There are two reasons to be interested in commodities. The first is the straightforward investment story, says Marc Gordon, managing director of Close Fund Management, which is currently raising money for a new commodities fund.

"The demand from the world's developing economies for oil and gas is surging," Gordon says. "And demand in Asia for industrial metals is also huge, as countries such as India and China build new infrastructure."

At the same time, Gordon points out that supply of commodities is not easy to increase overnight. It isn't possible suddenly to start producing more oil, or to increase gold mining. Reserves are limited and, in the case of some commodities, running out.

Mark Mathias, managing director of Dawnay Day Quantum, which is currently offering a commodities-based individual savings account (Isa) investment, says the global economy has changed. "The last big boom was driven by increased demand for services in the developed world," he says. "Now the boom is for physical goods: Asia is desperate for commodities."

The second reason to consider commodities is that spreading investments around different asset classes hedges your bets.

It is partly possible to do this through existing investments. Ben Yearsley, an investment analyst at independent financial adviser Hargreaves Lansdown, says that while few investors have bought commodity funds, let alone raw commodities, they may have exposure to the sector through other means.

"If you hold a UK equity fund, you probably have 20 per cent of your money in oil and mining stocks because companies such as BP, Shell and Rio Tinto account for such a large chunk of the UK stock market," he says.

Even so, Yearsley thinks investing more directly in commodities is a good way to diversify, albeit on a cautious basis. "With anything specialist, 5 to 10 per cent of your whole portfolio should be your maximum investment," he says.

As explained below opposite, investors have access to several funds that buy into companies involved in different commodities sectors. It is also now possible to invest in funds that trade commodities directly. The latter are a better way to diversify, argues Mathias. He says investors seeking to reduce risk need assets that have a negative correlation with each other; that is, their prices tend to move in opposite directions at any given time.

"There's a fundamental difference between holding shares in companies with exposure to commodity prices and the physical commodities themselves," says Mathias. "Physical commodities have a negative correlation with both shares and bonds, whereas shares in mining companies, say, by definition don't."

Mathias argues that by using shares to buy exposure to commodities, investors lose one of the most attractive features of the asset class: that it is a good hedge against disappointing returns on the stock market.

However, there are significant risks in commodity investments. Jamie Allsopp, manager of New Star Hidden Value fund, holds 10 per cent of his assets in commodities, but he prefers to invest in commodities-related companies. "Prices are buoyant but the investments can be very volatile," he warns.

There is also a danger that investors could be getting into commodities at the top of the market. Evy Hambro, who manages several mining and commodity funds for Merrill Lynch, says: "It's true that prices can't go on rising forever, but on the other hand, companies in this sector are now in much better shape."

Another risk is that commodities currently represent a gamble on the economic health of developing nations, particularly China. While there is every reason to be positive over the longer term about the prospects for the developing world, short-term ups and downs can produce disastrous results for investors.

Against that, some commodities are a safer bet than others. Gold, for instance, is traditionally the ultimate safe haven for investors worried about investment uncertainty. It will benefit from unforeseen shocks to the global economy - the effects of major terrorism, for example.

One person definitely sold on the commodities market is Jim Rogers, a professional US investor with a reputation almost as glamorous as that of Warren Buffett. Rogers has just published his latest book, How Anyone Can Invest Profitably In The World's Best Market, in which he argues: "The next bull market is here. It's not in stocks. It's not in bonds. It's in commodities."

Rogers argues that commodities have a reputation for high risk because so many investors have bought exposure through the complicated and dangerous derivatives market. In theory, he says, they should actually be less risky than shares.

After all, while a company can go bust, leaving shareholders with nothing, physical assets such as gold and oil will always have some value.

TWO WAYS INTO THE SECTOR

Professional investors win and lose fortunes by investing in commodities through futures contracts.

For most people, avoiding derivatives and investing through a collective fund makes much more sense. Their money is pooled with cash from other fundholders; and fund managers generally avoid the futures markets.

The first option is to invest into a unit or investment trust that gives exposure to commodities by buying shares in the companies that produce them.

Ben Yearsley, of Hargreaves Lansdown, tips two particular funds: First State Global Resources and JP Morgan Fleming Natural Resources. Both are broadly based.

Alternatively, two fund managers give direct exposure to commodities. Close Fund Management's Enhanced Commodities will invest equally in oil, gold and industrial sectors. It has a five-year life, with the fund guaranteeing your starting capital back at the end, plus 200 per cent of the return delivered by these three sectors.

Dawnay Day Quantum's Commodities Accelerator also operates over five years, with a 100 per cent capital guarantee, plus 200 per cent of performance. It casts its net wider, with exposure to five metals, plus crude oil, natural gas and heating oil.

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    SThree: HR Benefits Manager

    £40000 - £50000 per annum + pro rata: SThree: SThree Group have been well esta...

    Recruitment Genius: Office Manager / Financial Services

    £30000 - £37000 per annum: Recruitment Genius: Established in 1999, a highly r...

    Jemma Gent: Year End Accountant

    £250-£300 Day Rate: Jemma Gent: Are you a qualified accountant with strong exp...

    Jemma Gent: Management Accountant

    £230 - £260 Day Rate: Jemma Gent: Do you want to stamp your footprint in histo...

    Day In a Page

    HIV pill: Scientists hail discovery of 'game-changer' that cuts the risk of infection among gay men by 86%

    Scientists hail daily pill that protects against HIV infection

    Breakthrough in battle against global scourge – but will the NHS pay for it?
    How we must adjust our lifestyles to nature: Welcome to the 'Anthropocene', the human epoch

    Time to play God

    Welcome to the 'Anthropocene', the human epoch where we may need to redefine nature itself
    MacGyver returns, but with a difference: Handyman hero of classic 1980s TV series to be recast as a woman

    MacGyver returns, but with a difference

    Handyman hero of classic 1980s TV series to be recast as a woman
    Tunnel renaissance: Why cities are hiding roads down in the ground

    Tunnel renaissance

    Why cities are hiding roads underground
    'Backstreet Boys - Show 'Em What You're Made Of': An affectionate look at five middle-aged men

    Boys to men

    The Backstreet Boys might be middle-aged, married and have dodgy knees, but a heartfelt documentary reveals they’re not going gently into pop’s good night
    Crufts 2015: Should foreign dogs be allowed to compete?

    Crufts 2015

    Should foreign dogs be allowed to compete?
    10 best projectors

    How to make your home cinema more cinematic: 10 best projectors

    Want to recreate the big-screen experience in your sitting room? IndyBest sizes up gadgets to form your film-watching
    Manchester City 1 Barcelona 2 player ratings: Luis Suarez? Lionel Messi? Joe Hart? Who was the star man?

    Manchester City vs Barcelona player ratings

    Luis Suarez? Lionel Messi? Joe Hart? Who was the star man at the Etihad?
    Arsenal vs Monaco: Monaco - the making of Gunners' manager Arsene Wenger

    Monaco: the making of Wenger

    Jack Pitt-Brooke speaks to former players and learns the Frenchman’s man-management has always been one of his best skills
    Cricket World Cup 2015: Chris Gayle - the West Indies' enigma lives up to his reputation

    Chris Gayle: The West Indies' enigma

    Some said the game's eternal rebel was washed up. As ever, he proved he writes the scripts by producing a blistering World Cup innings
    In Ukraine a dark world of hybrid warfare and murky loyalties prevails

    In Ukraine a dark world of hybrid warfare

    This war in the shadows has been going on since the fall of Mr Yanukovych
    'Birdman' and 'Bullets Over Broadway': Homage or plagiarism?

    Homage or plagiarism?

    'Birdman' shares much DNA with Woody Allen's 'Bullets Over Broadway'
    Broadchurch ends as damp squib not even David Tennant can revive

    A damp squib not even David Tennant can revive

    Broadchurch, Series 2 finale, review
    A Koi carp breeding pond, wall-mounted iPads and a bathroom with a 'wellness' shower: inside the mansion of Germany's 'Bishop of Bling'

    Inside the mansion of Germany's 'Bishop of Bling'

    A Koi carp breeding pond, wall-mounted iPads and a bathroom with a 'wellness' shower