For the first time in almost a decade the stars are aligned for the commodities sector, according to Paul Brownsey, Pathfinder chief investment officer.
Brownsey said the performance of commodities has historically been linked to economic growth and rising inflation – both factors now apparently in play.
“We’re seeing synchronised global growth and signs of inflation for the first time since the GFC,” he said.
The more-or-less positive economic fundamentals has seen commodities investments perk up over the last year or so with a particularly “solid bounce” in the last six months, Brownsey said.
“There’s been an upswing in lots of commodity prices,” he said.
While Brownsey said it was impossible to predict the exact course of the commodities bull-run, “I suspect there is more to come”.
“Commodities tend to do nothing for some time and then experience significant growth,” he said. “The last [bull] cycle for commodities was about eight years.”
However, the intervening period has been tough for commodity funds – such as those offered by Pathfinder and AMP Capital to NZ investors.
According to the latest Melville Jessup Weaver (MJW) survey, the Pathfinder and AMP Capital commodity funds returned -4.4 per cent and 2 per cent, respectively, before fees and tax.
The Pathfinder commodity fund – the boutique’s first product – has dwindled to about $7 million as at March 31 compared to almost $40 million five years ago. Similarly, the AMP Capital product sits at just over $170 million – down from almost $450 million three years ago.
For Pathfinder the funds under management (FUM) fall was principally due to the exit of a wholesale client that “changed to an in-house commodities strategy” rather than dumping the asset class entirely, according to Brownsey.
Meanwhile, the AMP KiwiSaver scheme – one of the few to have a significant commodities allocation – cut back its weighting to the asset class in the last couple of years after sustaining performance drag.
Over the 12 months to March 31 the performance of both AMP Capital and Pathfinder commodity funds have picked up with respective gross returns of 6.2 per cent and 14.8 per cent.
Brownsey said the two funds follow different investment strategies: Pathfinder takes active positions using futures while AMP closely tracks the Bloomberg Commodities Index.
He said the Pathfinder approach depends heavily on “rules-based” quantitative investment that looks to take advantage of “mean-reversion” across different commodity prices.
Currently, the fund has a high exposure to energy and oil with about 10 per cent allocated to both agricultural and industrial metals.
“We also have about 5 per cent in cash,” Brownsey said – liquidity being an important feature of trading futures.
While the investment in oil and gas is at odds with the Pathfinder emphasis on environmental, social and governance (ESG) issues, he said the commodities market does operate differently to equities.
“We don’t provide capital to [commodity] producers and we don’t invest in the most egregious fossil fuel companies,” he said. “There’s also an argument that the futures market reduces the cost of energy and commodities for consumers over time by making it more efficient.”
Brownsey said Pathfinder was also considering introducing ‘green bonds’ into the mix.
“We’re just investigating how we could do that,” he said.