Raw-Material Resurgence Following Record Exit From Funds

Investors are being lured back to commodities after war and drought helped make raw materials the surprise best-performing major asset class in the first half.

About $5.9 billion was added to raw materials investments this year, compared with a record $50 billion withdrawn in 2013, Citigroup Inc. estimates. Assets under management of about $360 billion at the end of last year rose to $365 billion through May and probably increased again in June, the bank said yesterday.

While Citigroup and Goldman Sachs Group Inc. forecast in January that prices would fall or remain steady this year, Middle East unrest and pledges by central banks to keep interest rates low sent gold up 10 percent and boosted oil to a nine-month high. Lack of rain in Brazil lifted coffee 58 percent, helping commodities record the best first half since 2008.

“We’ve seen increasing allocations from asset managers this year and some new fund interest come into commodities,” Aakash Doshi, a Citigroup Global Markets vice president in New York, said in a phone interview June 24. “We’re starting off a lower baseline, and we’ve seen geopolitics and weather really come to the fore this year.”

The Bloomberg Commodity Index of 22 raw materials rose 7.1 percent in the first half. The gauge outperformed the MSCI All-Country World Index of equities, which added 4.9 percent, with dividends reinvested, and the Bloomberg Dollar Spot Index, which fell 1.6 percent against 10 major currencies. The Bloomberg U.S. Treasury Bond Index rose 3.3 percent.

Interest Returning

Interest is returning after routs in gold to corn last year wiped 22 percent off the value of commodity index funds and exchange-traded product assets, Doshi said. Investors pulled $27 billion from precious metals in 2013, more than half the outflow from all commodities. About $2.3 billion was added back this year. Gold, which ended a 12-year bull run in 2013 as the Federal Reserve prepared to withdraw economic stimulus, posted its first back-to-back quarterly gains since 2011.

Commodities are already trading independently, with coffee and nickel, up 37 percent, among this year’s best performers and cotton and copper, down 13 percent and 4.6 percent, among the worst. Goldman Sachs raised its 12-month allocation for commodities to neutral from underweight in May and Societe Generale SA predicts gains for cotton, livestock and tin. Credit Suisse sees higher platinum and palladium prices, with supply restrictions helping lead, zinc and nickel.

Bank Outlooks

Many institutional investors, including pension funds and endowments, have yet to return to commodities, Kevin Norrish, a head of commodities research at Barclays Plc, said June 27 by phone from London. The bank estimates withdrawals, which slowed to about $200 million in May, totaled $9.6 billion this year.

Societe Generale still sees overall gains muted, predicting the Standard & Poor’s GSCI Index to rise about 1 percent through year-end as copper and gold fall. Nickel and sugar will also rise, said Michael Haigh, the head of commodities research.

“It’s a really mixed bag across the different types of commodity sectors, as well as within the sectors,” Haigh said in a June 17 phone interview from New York. “We still are overweight agriculture, and energy to a slightly lesser extent. We’re massively underweight precious metals.”

El Nino

Prices may continue to be driven by weather, including El Nino patterns that can affect conditions through the warming of the Pacific Ocean. El Nino can cut monsoon rains needed for Indian sugar, bring drying winds to West African cocoa areas, reduce rainfall on Indonesian palm oil plantations and spur deluges on Brazilian coffee crops. It can also make North America mild and wet, which may benefit harvests and cut prices, Goldman says.

With the United Nations’ World Meteorological Organization giving a 60 percent chance of El Nino by late August, there are already signs of ample supply. Global corn inventories may rise to a 15-year high by the end of next season as U.S. corn and soybean harvests reach records, the U.S. Department of Agriculture estimates.

Smaller price swings may have contributed to less investor interest in commodities. The 60-day historical volatility for the Bloomberg gauge slid to an 18-year low last week. As politicians and regulators pressed banks to cut back commodities activities, Barclays and Deutsche Bank AG reduced head count and JPMorgan Chase & Co. and Morgan Stanley are selling units.

Hedge Funds

Hedge funds are bearish on wheat, with their net-short position in the grain the most since February in the week to June 24, U.S. Commodity Futures Trading Commission data show. They’re betting on price gains for 17 other commodities, holding a near-record position on crude as wagers on a coffee rally are near a six-year high set in March.

Oil may gain in the next six months as global economic growth expands, David Donora, head of commodities in London at Threadneedle Investments, who helps manage 89.7 billion pounds ($153 billion) in assets, said by phone June 18. World growth will accelerate to 2.7 percent this year, from 2.1 percent in 2013, the median estimate of economists surveyed by Bloomberg show. Credit Suisse said June 23 that Brent may reach $120 a barrel and raised the bank’s oil outlook for this year.

Brent reached a nine-month high June 19 as fighting engulfed Iraq, OPEC’s second-biggest producer. Militants seized territory on borders with Jordan and Syria, edging the country closer to sectarian conflict and stoking fears of civil war. The crisis comes after Russia’s seizure of Crimea sparked a standoff, endangering European natural-gas supplies.


Investors may seek commodities as a diversification from other assets, according to Credit Suisse. While the majority of attendees at a June 24 conference held by the bank are currently underweight or neutral, 42 percent expect to be overweight in the next 12 months and 40 percent will be neutral. The Bloomberg commodity gauge reached a 13-month high in April and is still trading 44 percent below its 2008 peak.

“We remain optimistic for the second half,” Thomas Saulnier, portfolio manager at Gaia Capital Advisors who helps manage about $90 million in assets, said by telephone from Geneva June 18. “There is more room to move higher for most commodities.”

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