NETHERLANDS - Despite the strong price rises so far, commodities are still a sensible asset class to invest in, says Dutch pensions investment management consultant Compendeon.
Last month some of the largest Dutch schemes reported that rising oil prices had been the main driver behind strong returns on their commodities portfolios.
“Diversification in commodities will lead to risk reduction and the historic returns have been reasonable,” writes Harry Geels, senior investment manager of Compendeon.
“And if the present booms continues, not participating might cause an enormous loss of returns, although tactical allocation is advisable for a timely cutting down interests in commodities”.
Geels is referring to an academic study from 1999, which showed that the correlations of almost all asset classes – except commodities - tend to converge during periods of stress.
“The demand for commodities is linked with economic development, while the rise of shares is mainly the result of expectations, and bonds are linked with interest,” he explained.
Geels said: “The Goldman Sachs Commodity Index of the past thirty years shows average returns of 12%, however with a volatility which is higher than equity.
“Besides the GSCI - based on a global turnover in which oil accounts for 70% - there is the Roger International Commodity Index covering at least 35 commodity classes. The spread avoids the volatility of one specific commodity, but allows profiting of less well-known commodities”.
According to Geels the present commodity boom is not yet comparable to the hype which eventually led to the Nasdaq bubble at the end of the last century. “A scenario of further prices rises in the long term is more likely, because of the great demand from Asia, the inelasticity of the supply and the expected inflation cycle”.
“Inflation is the main driver of price rises of commodities, which are a perfect hedge against inflation. Once the inflation has materialised, the hedging investors will jump onto the accelerating commodity train. This might start a new hype”, Geels added.
He however thinks there won’t be hype for the time being. “At the end of last century investors were only interested in technology. They didn’t invest in the oil industry, ports and shipping. That’s the reason of the present problems in supply”.
In Geels’ opinion the commodity cycle is a good example of ‘near-sightedness’ of investors. “One should think contrary, and buy while nobody else does. Contrary thinking is one of the main qualities of long-term investors, like pension funds.”