An Investment Fund for Commodities?

JohnRo

I've been looking at the Investec enhanced natural resources fund recently. It has a slightly different approach to the sector. It uses both long and short positions to try and make gains in all market conditions. I haven't purchased it but it does seem to show some relative success when compared with other funds in the sector.

http://www.trustnet.com/Tools/Charting.aspx?typeCode=U_FBTP4,XU:SP

horlicksjan

rpc wrote: »

You should! Commodity prices and equities in commodity companies are related but different beasts.

OK, let me rephrase that. I am not averse to either on principle. But I favour a fund or ETF that reflects a direct investment in commodities - for the reasons I went on to say, i.e. I already have exposure to commodities companies in my share holdings and index tracker funds.

I am looking for exposure to commodities to balance my portfolio with some asset classes (property, commodities, bonds) which tend to have returns uncorrelated to equities (where most of my portfolio is at present). I would like a low Total Expenses Ratio. Basically what I said in my first post.

marathonic

horlicksjan wrote: »

I am looking for exposure to commodities to balance my portfolio with some asset classes (property, commodities, bonds) which tend to have returns uncorrelated to equities (where most of my portfolio is at present). I would like a low Total Expenses Ratio. Basically what I said in my first post.

Be careful with this. Make sure you fully research what you invest in.

For example, there are ETF's for Gold (GLD), Natural Gas (UNG) and many others. These ETF's invest via the futures market as opposed to holding the commodity outright.

You should do some research around 'contango'. Basically, UNG might own futures on Natural Gas for July maturity this month. However, the investment company running UNG, obviously, don't want to take delivery of Natural Gas.

Therefore, instead of letting the contract run to maturity, they sell it and purchase futures for August maturity.

The price of futures for August delivery will be more expensive than July contracts because they factor in:

• Storage costs;
• Loss of interest on money tied up;
• etc.

For this reason, the investment company might sell contracts representing 1000 units of Natural Gas but only be able to afford the longer-dated contracts for 980 units of Natural Gas.

What this means is that, over a 12-month period, Natural Gas might stay at the exact same price but, through the monthly rolling forward of futures contracts, UNG might lose 20%+.

A lot of people invest in things like UNG thinking it'll track the underlying commodity precisely and that the only charge is the TER - THIS IS NOT THE CASE.

For this reason, I think equity funds are a much better choice. With the possible exception, if you were that way inclined, of holding physical precious metals for a small percentage of your portfolio.

Note: The 20%+ figure quoted above isn't over-exagerrated. I remember when I done research on Natural Gas a few years ago, contango was thought to have account for almost 19% of the loss in UNG over the precedding year - as far as I can remember, Natural Gas had risen slightly but UNG had dropped over 10%.

Shaolin_Monkey

Here are a handful of diversified ETC's, with the identifier afterwards. As I said earlier it's my personal belief is that I do not think these are great. I don't think there's anything wrong in theory with having commodities as part of a long term portfolio, but in practice there are issues with the products available.

ETFS DJ UBS All Commodities - AGCP
LGIM Commodity Composite Source - LGCF
Lyxor CRB - CRBL

Because most commodities cannot be held in physical form, these funds can only approximate the price movements of the underlying commodities.

An equity index tracker is simple to understand, it buys the shares in the underlying index. Likewise, a bond index tracker buys the underlying bonds. Does a diversified commodity fund buy bags of corn, rice, blocks of copper, barrels of oil and so on and lock them up in a warehouse? Of course not. Instead they buy futures and forward contracts in the various commodities in an attempt to replicate the movement in the commodity prices. The problem is over the longer term significant tracking errors can occur between the actual commodity prices and the fund. Read the small print - they will say that the fund will not track the spot price of the commodity. Here is an article covering some of the issues with commodity ETF's/ETC's - http://emergingmoney.com/etfs/beware-tracking-error-when-trading-commodity-etfs/

Also remember commodities pay no interest or dividends.

marathonic

Just looking at the prices of 1oz Gold Brittannia coins - down to £888.

The magpie within me is tempted given my expectation for high inflation over the next 2-3 years.

Much, much better than buying £888 worth of GLD in my opinion.

horlicksjan

Shaolin Monkey and marathonic Thank you for the info explaining the problems with ETFs.

I think I should avoid the ETFs as it does seem that investing in a fund which invests in companies that focus on commodities looks the better option. Originally I avoided this as I assumed that I would already have exposure to these companies by way of index trackers, so I didn't want to be just doubling up on oil companies, miners and energy. But maybe these funds will be a better way after all.

I narrowed my choice down to 4 possibles, but because of the issues highlighted with ETFs I think I will exclude the first.

Can anyone see any issues with my remaining three?

[STRIKE]Source LGIM Commodity Composite ETF (GBP) LGCF (IE00B4TXPP71)[/STRIKE]

Schroder AS Commodity A USD Acc (LU0232504117)

BlackRock Commodities Income Investment Trust Plc BRCI (GB00B0N8MF98)

BlackRock World Mining Trust BRWM (GB0005774855)

Ark_Welder

marathonic wrote: »

For example, there are ETF's for Gold (GLD), Natural Gas (UNG) and many others. These ETF's invest via the futures market as opposed to holding the commodity outright.

Unlike UNG, GLD holds the physical asset rather than futures. With the LSE-listed Gold Bullion Securities ETF it is possible for an investor to take possession of the physical gold bullion in exchange for their holding in the ETF.

Shaolin_Monkey wrote: »

An equity index tracker is simple to understand, it buys the shares in the underlying index.

Unless it is a synthetic ETF, such as most of the Lyxor FTSE100 ETF.


+++

As an aside, a recent article about physical bond and EM ETFs from the FT makes for an interesting read. Google Bond sell-off causes stress in ETF industry and follow the link.

grey_gym_sock

Ark_Welder wrote: »

a recent article about physical bond and EM ETFs from the FT makes for an interesting read. Google Bond sell-off causes stress in ETF industry and follow the link.

thanks ... this quote made me laugh:

“The losses for ETFs today were far beyond what the most sophisticated financial risk models could have predicated for worst-case scenarios,” said Bryce James, president of Smart Portfolio, which provides ETF asset allocation models.

planteria

not necessarily answering your question, but i came out of a general commodities fund. several large, well-diversified miners had done much better than funds holding miners had.....

so i hold:

Glencore Xstrata (i had invested in Xstrata)
Anglo American
Eclectica Agriculture
S&W Global Gold & Resources

Ark_Welder

grey_gym_sock wrote: »

thanks ... this quote made me laugh:

Quote:

“The losses for ETFs today were far beyond what the most sophisticated financial risk models could have predicated for worst-case scenarios,” said Bryce James, president of Smart Portfolio, which provides ETF asset allocation models.

Didn't do what is said on the Sn...?