GLOBAL - Appetite for commodities has picked up in recent months, and UK pension schemes are expected to allocate considerably more to the asset class in future, according to UK fund manager Hermes.  

Hermes said the commodities market has shown encouraging signs of growth and that pension schemes would do well to increase direct investment in the asset class.

Colin O'Shea, head of commodities, told IPE: "UK pension plans usually allocate 3-5% of their capital to commodities, using the Standard & Poor's-Goldman Sachs or the Dow Jones-UBS benchmarks.

"The asset class is still under-represented in their portfolios, but we expect this allocation to go up over the next months."

He added: "Prices for energy and agricultural products, as well as gold, are likely to increase before year-end due to tight market conditions, with a supply level inferior to the demand."  

Traditionally, commodities present several positive aspects for pension funds, as they are less correlated to other asset classes, offer good protection against inflation and can provide a high return on investment similar to equities, O'Shea said.

However, he also stressed that the correlation between commodities and other asset classes had increased over time - apart from bonds.

"This is due to the decrease in interest rates and in bond yields, which has led to a rise in bond prices," he said. "This divergence in prices means bonds and commodities perform differently." 

Gold is currently one of the most attractive commodities. Last month, Erste Bank called on institutional investors worldwide to allocate more to gold, recommending they invest as much as 5-10% to the metal and dismissing fears of a bubble.

In a previous interview with IPE, Didier Borowski, head of strategy and economic research at Amundi, said: "Many investors continue to see gold as a way to hedge a possible 'black swan', using the metal to protect themselves against unexpected events such as financial meltdown, a dollar crisis or tensions in the Middle East".

Topics