The Analyst: There's profit in pricey commodities

Commodities, especially oil, are making the headlines again. However, this time it is because the price is moving down rather than up. So, the key question is whether we have reached the end of the commodity boom. The first point should be to put these things in perspective: the oil price has experienced short-term falls of around 20 per cent on 12 occasions since 1999, but overall the price is massively higher over that period. So the current volatility is hardly an unusual event.

We should also remember that the recent upsurge in the oil price always looked unsustainable in the short term; at some stage, a price shock of that magnitude is bound to affect consumer behaviour and the price will correct. We have seen evidence of this in America and the UK, and also in emerging markets, where oil subsidies are being reduced or taken off altogether.

People are now saying that, with global growth falling, the demand for commodities must ease. On the surface that seems like a perfectly reasonable conclusion, but my own view is rather more optimistic. Generally speaking, the supply/demand equation is still supportive of high prices. In past global slowdowns we have never seen big demand from emerging markets; however, now they are generating huge domestic demand for commodities and this can't disappear overnight.

Now, clearly, these nations don't live in a bubble, and their economies must surely slow down to some extent too. I don't know how long the pause for breath in commodities will last, but as I have stated in previous columns I believe we are witnessing a huge industrial revolution which is going to have a massive effect. The Western industrial revolution had a huge effect on the globe and this is far bigger.

One company that has been putting great emphasis and commitment in this area is Investec. It has launched a number of commodity-related funds, but I thought I would bring to your attention the one that they launched in May of this year, called Enhanced Natural Resources.

Investec boasts a resource team of 10 with a combined experience of 80 years, headed up by Bradley George. George himself has 12 years experience in this field, having joined Investec in July 2006 from Goldman Sachs. The fund is co-managed by George Cheveley, who joined the team in 2007 as a metals specialist, and was previously an analyst for global mining giant BHP Billiton. The fund can choose from more than 800 shares and exchanged traded commodities, but what makes it unusual in this sector is that it can also "short" (giving it the potential to profit when prices fall).

The goal behind shorting is to reduce the portfolio's overall volatility and smooth out some of the big corrections that we see in commodities. The fund is likely to hold 10-15 commodity positions (ie the actual commodity itself) and somewhere between 30 and 35 shares.

Remember that the commodity itself and the equities don't necessarily move in tandem with one another. The team look very carefully at the supply/demand situation for each commodity, which assists them in forecasting potential trends. Alongside this is their equity research, which grades companies on such things as earnings estimates, valuation, asset quality, momentum and capital management. These two aspects of research are put together to highlight areas of opportunities in the market.

The team remains of the opinion (as do I) that commodities, particularly energy, are a massive long-term investment story. Such cycles usually last for around 15 years, and as this one started in 1999 that suggests we could still have a long way to go. However, as with any bull market, prices can still fall – and fall dramatically – along the way. Those with long memories will recall the Stock Market crash of 1987, which felt like Armageddon at the time but now looks like a mere blip on the charts.

Those who want a more defensive fund may wish to consider the Investec Enhanced Natural Resources Fund. The fund got off to a poor start, and actually fell sharply in July. In defence of Messrs Bradley and Cheveley, the extreme volatility seen in the sector would have made anyone's life difficult. It is too early to say whether the fund will be a success, but it is certainly an intriguing concept and one I will be keeping my eye on in future.

M ark Dampier is the head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more information about the funds included in this column, visit

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

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

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

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Recruitment Genius: Digital Optimisation Executive - Marketing

    £30000 - £35000 per annum: Recruitment Genius: The UK's fastest growing, multi...

    Recruitment Genius: Financial Reporting Manager

    £70000 - £90000 per annum: Recruitment Genius: A Financial Reporting Manager i...

    Recruitment Genius: Payments Operations Assistant

    £23000 - £25000 per annum: Recruitment Genius: They win lots of awards for the...

    Recruitment Genius: Telephone Debt Negotiator

    £13500 - £20000 per annum: Recruitment Genius: This nationwide enforcement com...

    Day In a Page

    Syria civil war: Meet the military commander who says his soldiers will not rest until every inch of their war torn country is free of Islamist 'terrorists'

    ‘We won’t stop until Syria is back to normal’

    Near the front lines with Islamist-controlled towns where Assad’s troops were besieged just last month, Robert Fisk meets a commander confidently preparing his soldiers for battle
    Fifa corruption: Strip Qatar of the World Cup? Not likely

    Strip Qatar of the World Cup? Not likely

    But if a real smoking gun is found, that might change things, says Tom Peck
    Twenty two years later Jurassic Park series faces questions over accuracy of the fictional dinosaurs in it

    Tyrannosaurus wrecked?

    Twenty two years on, Jurassic Park faces questions over accuracy
    The inside story of how Bill Clinton built a $2bn global foundation may undermine Hillary's chances

    The inside story of how Bill Clinton built a $2bn global foundation...

    ... and how it may undermine Hillary's chances in 2016
    Genes greatly influence when and how many babies a woman will have, study finds

    Mother’s genes play key role in decision to start a family

    Study's findings suggest that human fertility is still evolving
    12 best olive oils

    Extra-virgin, cold-press, early-harvest, ultra-premium: 12 best olive oils

    Choosing an olive oil is a surprising minefield. Save yourself the hassle with our handy guide
    Rafa Benitez Real Madrid unveiling: New manager full of emotion at Bernabeu homecoming

    Benitez full of emotion at Bernabeu homecoming

    There were tears in the former Liverpool manager’s eyes as he was unveiled as Real Madrid coach. But the Spaniard knows he must make tough decisions if he is to succeed
    England can win the Ashes – and Elvis Presley will present the urn

    England can win the Ashes – and Elvis will present the urn

    In their last five Test, they have lost two and drawn two and defeated an India side last summer who thought that turning up was competing, says Stephen Brenkley
    Sepp Blatter resignation: The beginning of Fifa's long road to reform?

    Does Blatter's departure mean Fifa will automatically clean up its act?

    Don't bet on it, says Tom Peck
    Charles Kennedy: The baby of the House who grew into a Lib Dem giant

    The baby of the House who grew into a Lib Dem giant

    Charles Kennedy was consistently a man of the centre-left, dedicated to social justice, but was also a champion of liberty and an opponent of the nanny-state, says Baroness Williams
    Syria civil war: The harrowing testament of a five-year-old victim of this endless conflict

    The harrowing testament of a five-year-old victim of Syria's endless civil war

    Sahar Qanbar lost her mother and brother as civilians and government soldiers fought side by side after being surrounded by brutal Islamist fighters. Robert Fisk visited her
    The future of songwriting: How streaming is changing everything we know about making music

    The future of songwriting

    How streaming is changing everything we know about making music
    William Shemin and Henry Johnson: Jewish and black soldiers receive World War I Medal of Honor amid claims of discrimination

    Recognition at long last

    Jewish and black soldiers who fought in WWI finally receive medals after claims of discrimination
    Beating obesity: The new pacemaker which helps over-eaters

    Beating obesity

    The new pacemaker which helps over-eaters
    9 best women's festival waterproofs

    Ready for rain: 9 best women's festival waterproofs

    These are the macs to keep your denim dry and your hair frizz-free(ish)