Deutsche Bank quits commodities, but keeps index funds

NEW YORK Thu Dec 5, 2013 6:19pm EST

The headquarters of Deutsche Bank are pictured in Frankfurt October 29, 2013. REUTERS/Ralph Orlowski

The headquarters of Deutsche Bank are pictured in Frankfurt October 29, 2013.

Credit: Reuters/Ralph Orlowski

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NEW YORK (Reuters) - Deutsche Bank, which is quitting trading in most raw materials markets, will retain its near $9 billion commodities index fund business, a strategy industry experts said helps the German bank profit from fees and maintain ties with some of the largest investors.

It also shows that the world's biggest banks were not giving up yet on passive commodity investment tools such as indexes, despite research pointing to substantial outflows of money from such products this year.

A top-five financial player in commodities, Deutsche Bank said on Thursday it will cease trading energy, agriculture, base metals, coal and iron ore, while retaining precious metals and a limited number of financial derivatives traders. It cited mounting regulatory pressure.

But the bank will continue to deal in commodity indexes, said spokeswoman Renee Calabro in New York.

Industry experts said commodity indexes were shielded from the lower profit margins, higher capital requirements and growing political and regulatory scrutiny that were forcing banks out of proprietary and physical trading of commodities.

"What we need to distinguish here is that commodity indexes are fee-generating services where banks make profit for investments done on behalf of clients, without having any risk on their books," said Adam Sarhan, president at New York financial advisory firm Sarhan Capital.

"It's the turnpike where they collect a toll each time a commodity client passes by."

Data from Lipper, a Thomson Reuters company, showed that Deutsche Bank had at least seven actively traded index products in commodities, including exchange-traded funds and mutual funds, with total assets of about $8.8 billion as of end-October. Of these, the largest was the Power Shares DB Commodity Trading Index, which alone had about $6 billion tracking it.

Fees, aside, index clients were often the biggest pensions, endowments and family offices, target investors that banks wanted to nurture.

"These are institutional investors who are likely clients to a bank in many other aspects," said Eliot Geller, managing director at Core Commodity Management in Stamford, Connecticut.

"If you're an investment bank that is exiting certain areas of commodities, it makes sense to continue with your indexes as you'll continue working with extremely large, prominent and significant investors. It's probably a net benefit to overall business and the reason I think investment banks in general want to stay in that area."

But commodity index strategies have also not fared too well with investors lately.

Citigroup estimates that an all-time high of $36 billion has left passive commodities strategies to date this year, compared with net inflows of $27.5 billion in 2012.

Some think the outflows have been overplayed and that commodity indexes are far from their sunset days.

"What we have now is a very tough regulatory environment in commodities. That can change, and when it does, you want to be somewhere in the commodities business to get back in," Sarhan said.

(Additional reporting by Josephine Mason; Editing by Gerald E. McCormick and Andre Grenon)

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Comments (3)
laurel1 wrote:
What the heck?!?! Are they going to do actual banking instead? How are they going to pay everyone those million dollar bonuses…doing actual banking instead of front-running and market manipulation and pump and dump?

Dec 05, 2013 11:21am EST  --  Report as abuse
laurel1 wrote:
Do you mean that supply and demand might rule prices? You mean they aren’t going to set up a shadow group in London with banking in the Isle of Man with accounts in the Cayman’s with proprietary patents in Ireland?

Dec 05, 2013 11:23am EST  --  Report as abuse
rvm3 wrote:
They are leaving the business for the same reason other banks are, namely the demise of customer flow. They blame regulation for political reasons. But the phones have stopped ringing because customers either are unsure of their futures or are not fearful of rising prices.

Dec 05, 2013 2:49pm EST  --  Report as abuse
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