* Passive commodities investments underperforming
* Spot oil, gold, other commodities slump
* But global demand for may materials still rising
* Knowledge of markets still offers profits, traders say
By Christopher Johnson and Emma Farge
LAUSANNE, April 16 Investors are reassessing
commodities after sharp price falls and years of poor returns,
but traders say the long-term outlook is still promising for
those with specialised expertise.
Global demand for raw materials will continue to increase as
the populations of China and other emerging economies consume
more, offering support for prices and creating local shortages
and price imbalances that can provide attractive margins.
But those margins will be best captured by professionals in
the big trading houses and specialists in investment banks or
funds, rather than through passive investment funds which just
"Some investors have been looking again at the markets in
the last six months," Ian Taylor, president and chief executive
of the Vitol group said on the sidelines of an FT commodities
conference in Switzerland.
"There is a realignment going on in the attitude to
markets," Taylor said.
Price falls have already taken their toll on some managers
of commodities investment funds, he said. "We have already seen
some funds going out of business."
Gold fell to two-year lows on Tuesday, while oil
slumped to its lowest for nine months as disappointing
data from China and the United States fuelled worries about
Commodities indexes have underperformed other financial
markets for several years, curbing enthusiasm for purchases of
raw materials such as oil, metals and agricultural products.
Passive investors have been badly burned as total returns on
the two big commodity indexes - Standard and Poor's Goldman
Sachs Commodity Index and Dow Jones-UBS Commodity
Index - both have shown losses of around 4 percent
this year, while the S&P 500 equity index has risen 12 percent.
"RETHINKING" PASSIVE INVESTMENTS
On top of outright falls, the structure of many commodities
markets has hurt passive investors.
If nearby months in futures markets trade at a discount to
later months, investors at the front of the price curve have to
pay to roll their investments forward when front months expire.
Over the last decade many financial institutions have set up
funds that track movements in commodity indexes, saying these
would offer investors a hedge against inflation and a chance to
diversify risk away from equities and bond markets.
This view is now under heavy scrutiny.
"We see some revisiting of that rationale," said David Fyfe,
head of market research at trading house Gunvor SA. "Arguments
for portfolio diversification may have diminished. Investors are
certainly rethinking the passive side of the business."
Vitol's Taylor agreed, "The argument for buying commodities
as a hedge against inflation or for diversification are not as
But some of the underlying arguments for commodities remain
intact as global population growth powers consumption and
underpins a long-term growth in prices, traders say.
"Chinese economic growth is slowing down, but they will
definitely stay on a growth path, and that is not going to
stop," said Marco Dunand, chief executive of Mercuria, one of
the world top five energy traders.
Alberto Weisser, chief executive of food trader Bunge Ltd
agreed: "Agricultural products demand is growing all the time."
Rising demand for food, fuel and the raw materials to build
homes and infrastructure will create shortages in some areas
that will need to be filled by surpluses elsewhere - price
imbalances that offer profits for traders and other investors.
So the onus is on skilful active management of assets.
"The skill that matters today is in the analysis,
interpretation and the insight derived from (an) openly
available mountain of knowledge," Greg Page, chief executive of
agricultural trading giant Cargill, told the conference.
(Editing by Jane Baird)