New players and increasing competition in the commodities market has led to diminishing returns, but the interest from pension funds has continued.
The trend follows that of the hedge fund market, where despite mediocre returns seen last year from some strategies, institutional investors continued to pump money into the asset class.
Recent volatility in global financial markets has further hit commodities and led hedge funds to reduce their riskier exposure to these assets.
However, investors argued that they are in the asset class for the long-term and are not put off by declines.
Torsten de Santos, director, commodity investor solutions at Barclays Capital, said: “Last year we were saying that commodities will become mainstream; this year we are saying it is mainstream. It is because commodities have become mainstream, returns are diminishing.”
However, Mr de Santos said more products must be developed and different strategies should be adopted.
He said there has already been an enormous growth of structured products in the market place.
“Pension funds now have to become more selective and it is the early adopter of these strategies that will be winners.”
He added that pension funds have decreased their allocation to commodities, but many still continue to invest.
“Pension funds are in there for the long-term and commodities are a long-term investment.”
He cited the GSCI commodity index, which last year saw a decline of 20 per cent.
Paul Horsnell, head of commodities research at Barclays Capital, added that there was a massive interest in new sectors, such as environmental markets.
“Climate change has been a very important area going forward.” He added that China was “a major story” for commodities in the future. Mr Horsnell said emerging markets were generally popular.
Stephan Wrobel, chief executive officer and partner at Switzerland-based Diapason Commodities Management, said commodities investment is picking up across the globe and there has been increased activity in Europe, namely in Switzerland, Italy, and the UK. However, Spanish and German pension funds have been slow on take-up. He said interest in commodities is also picking up among Japanese and South East Asian institutional investors, where Diapason is winning a lot of business.
“Commodities have zero negative correlation. If equities do not do well, then commodities do. They protect against inflation – so pension funds are keen to invest in them,” said Mr Wrobel.
He advised pension funds to hold between 10 per cent and 12 per cent in the asset class and noted that schemes holding a lower amount are slowly increasing their allocations.
“Some pension funds are only holding 1 per cent to 3 per cent, but this is increasing,” he said.
In a separate development, Diapason is also looking to expand its services in the US with the opening of a New York office in the near future.
Mr Wrobel said: “We have a large client base in Switzerland, Canada and the UK but only a small one in the US, which we want to expand on.”
He added that the company is working through legal issues before it is able to go ahead with the opening of the office.
KF
