Commodity bets ride on divergence and change

Asset Class in Focus

Commodity prices have experienced wild swings over the past few years, and investors in commodity funds have had to be risk-tolerant.

Take oil as an obvious example. The price of the benchmark West Texas Intermediate crude soared 45% in 2016 (after plunging 31% the previous year) rose another 12% in 2017 and dropped 25% in 2018, according to Macrotrends data.

However, Hong Kong and Singapore retail investors in commodities would have been better off buying a rare commodity-based fund in early 2016 which had exposure to oil producers, rather than one of the eight funds that focus exclusively on gold miners.

Amundi Asset Management provides a good example, because it runs both types of fund – and the contrast in performance is significant.

The three-year cumulative US dollar return on its CPR Global Resources Fund is 35.9%, compared with only 10.11% on its CPR Global Gold Mines Fund. Core holdings in the former include Royal Dutch Shell, Total and Chevron, as well as the mining groups Barrick, Newmont and Franco and others that also are positions in the portfolio of the latter.

The gold price has risen 10% since February 2016 and is up 2% so far this year, as the US dollar has weakened since the Federal Reserve turned less hawkish about interest rates.

Yet, that performance pales next to the oil price trajectory. WTI has risen 48% since 2016 and has surged 17% so far this year, according to Macrotrends.

As a general rule, the price of gold falls when the US dollar rises against other currencies. Simply put, the lustrous yellow metal becomes more expensive to potential buyers with, for example, euros or rupees.

Usually, an inverse relationship has also existed between the price of oil and the dollar for two reasons.

First, a barrel of oil is priced in dollars, so you need fewer of them to buy a barrel when the currency is strong. When the greenback is weak, the price of oil is higher in dollar terms.

Second, the US has historically been a net importer of oil, so higher oil prices fuel the country’s trade deficit (more dollars are sent abroad).

However, in recent years the second premise has broken down. Since 2011, the US has been net exporter of oil due to its shale revolution, according to the US Energy Information Administration.

Consequently, that inverse relationship has become less stable – offering new opportunities for investors in commodity funds.

It could also mean an increase in the sector’s characteristic volatility. The Hong Kong equity commodity fund category average volatility, annualised over the past three years, was 18.84 compared to the MSCI World (11.52) and the S&P 500 (12.60), according to FE.

 

Amundi CPR Global Resources Fund vs Amundi CPR Global Gold Mines Fund

Source: FE Analytics. Three-year cumulative performance in US dollars. Note: The MSCI World Energy & Materials Index is used for reference and is not the benchmark for either fund.

 

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