Eighteen respondents (56%) to this month’s Off The Record survey had commodities or commodity futures in their portfolio.

Of the 14 respondents that did not have commodities in their portfolio, just three planned to include them. Nine said they would not, with a Swedish fund giving its reasons:
“[Firstly] ethical considerations. Politicians are afraid that owning commodities might drive food prices in the third world. [Commodity investment also] requires special competence, and we see better opportunities in other asset classes.”

One UK fund felt commodities were “unlikely to outperform equities in the long term”. Another said, simply: “It’s a bubble.”

A further two respondents stated that they had removed commodities from their portfolio.
A Dutch fund stated that “diversification [was] not there when needed, [and the] correlation with inflation [was] weak,” while a Danish fund simply believed the asset class to be “too volatile”.

Half of those with an allocation said they were underweight in commodities, with only slightly fewer stating they were neutral. Only one fund was overweight in commodities.

Two-thirds thought they were most likely to maintain their current strategic allocation to commodities. Five respondents were set to increase their allocation. “Commodities are now at a moderate price level, with mid-term and long-term potential to climb,” commented a Dutch fund. Another Dutch fund planned to decrease its allocation, as it was “not satisfied with the risk/return ratio”.

The most common reason for allocating to commodities, as identified by 14 respondents, was the delivery of genuine diversification benefits. Eleven respondents allocated to commodities as they felt them to be a hedge against inflation, five because they believe that the supply of commodities is becoming more constrained, and a further five because they believe they are in a long-term ‘supercycle’, driven by demand from emerging markets. A Dutch fund stated one of its main reasons for allocating was to “hedge against global political turmoil”.

Energy was considered the most important commodity group, followed by industrial metals, then soft commodities, and lastly precious metals. A Spanish fund commented: “Gold is a strategic hedge to our risky assets in a deflation scenario.” A Dutch fund was very clear as to why energy was the most important commodity group. “Energy has the biggest weight in the index; oil is the most important commodity for the world economy; energy offers the best inflation hedge, and it offers a hedge against geopolitical risks.”

China’s attempt to slow down its economy, and a longer-term transition away from capital spending growth to consumption growth had changed eight respondents’ expectations about which commodities will outperform in future. “Agriculture and softs will become more sensitive to Chinese demand,” stated a UK fund. A Swiss fund said: “As long as our manager chooses total return swaps, they surely consider world economics, but they do not pick individual commodities.”

Eight respondents had not changed their view on commodities at all, and four said they would make them more bullish. A Dutch fund said that China’s slowdown would reduce demand and prices in the short term, but added: “Within three to five years, demand will outgrow supply.” Only one said that developments in China had made it less bullish.

Eleven respondents said they did not believe in the commodities ‘supercycle’, although eight held the opposite view and felt the ‘supercycle’ was not over. A Dutch fund commented: “[There are] still supply constraints that require additional investments, which require high prices. [Also] China and the emerging market’s ascent in the world economy is not over, so demand for commodities [will] stay high for the foreseeable future.”