Don't fancy buying the mine? Go for the shovel
LONDON (Reuters) - A story is told in financial circles that it was not the miners of the California Gold Rush who made money, it was the people who sold them shovels.
Something of the same can be said today, with many players inside the markets increasingly tapping into the oil, metals, minerals and agriculture boom by hitting up investments on the periphery rather than at the core of the phenomenon.
This is not to say that buyers of commodity futures have not been making money -- copper is up 18 percent year-to-date, corn 51 percent and oil, famously, has shot up 38 percent.
Many hedge funds and others geared to alternative investments have made a killing.
But not all investors are allowed to or want to put their money directly into futures, either because mandates from pension funds and the like prohibit it or because the nature of futures trading puts them off.
These are, if you like, the mainstream investment companies who are not particularly attracted to what can be super-volatile futures.
"The traditional rationale for that is that commodities are not a financial asset," said Andrew Milligan, head of global strategy at British fund managers Standard Life Investment. "There is no yield from commodities."
What Milligan means by this is that although commodity futures can bring profits, they do not supply returns in the same way that stocks, bonds and cash can via an earnings stream, dividends, coupons or a simple interest rate.
SEEKING THE SHOVEL MAKER
The main trend among investors not willing to go the direct futures route is that of seeking the Gold Rush miner's shovel. In other words, they are looking for the investments likely to be carried along by the commodities boom.
This can be seen from the out performance of certain stock sectors in a market climate that has kept major, broad indexes deep in negative territory for most, if not all, of 2008.
The DJ STOXX European basic resources index, for example, has gained more than 5 percent year-to-date compared with the broader DJ STOXX 600's near 16 percent loss.
Burrowing down into individual stocks has been even more lucrative. Shares in BHP Billiton, the world's largest mining group, have gained more than 19 percent.
A more recent phase is to seek out services companies such as oil-rig makers and specialist software firms. This is likely to be particularly the case in agriculture, where it is hard for investors to tap into the boom because the sector is not a core one for direct equities.
Neil Dwane, chief investment officer in Europe for RCM, says fund firms like his can find opportunities in companies that make the things needed for agriculture.
"The underlying fabric of the agricultural boom is potentially to look at companies like Syngenta and Bayer, which have big agricultural fertilizer, pesticide, seed businesses," he said.
A more direct approach -- but still an arm's length from actually owning commodities -- is to buy in through investable indexes, often run by investment banks, which also offer access through exchange-traded funds.
The investable indexes have been working well in the current boom. The S&P GSCI, for example, gained 29.5 percent in the five months to the end of May. Deutsche Bank's equivalent returned 31.4 percent.
Tony Dolphin, economics and strategy director at Henderson Global Investors, also notes that growing demand has prompted many investment banks to tailor their indexes when asked, cutting back on the weighting of oil, for example.
The search for exposure, meanwhile, has also prompted market players to differentiate between countries which benefit or suffer from the new world of high-priced oil, farm produce and metals.
In much the way that investing in related stocks can latch on to the commodities boom, so commodity-producing countries are now being favored over importing nations.
Brazil's Bovespa stock index is up 6 percent as investors swoop to take advantage of its commodity-rich economy, while importer Malaysia's bourse is down nearly 15 percent.
"Country analysis is starting to become incredibly important again," said Standard Life Investment's Milligan. "You can't simply say I like emerging markets. You can't even say I like such and such a region."
(Editing by Malcolm Whittaker)
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