* Upturn in global demand may help price performance
* Some commodities still held back by supply surpluses
* Credit Suisse fund tops 2013 Lipper league table
(Adds comments from Psigma CIO, details on hedge fund closures)
By Claire Milhench
LONDON, Jan 15 Commodity fund managers face an
uphill struggle persuading investors to return to the unloved
sector after an abject year in which just two actively managed
funds in the 122-strong Lipper Global Commodity group made
Although a pick-up in economic growth is expected to boost
demand this year, some commodities will remain hobbled by
oversupply, making 2014 a crunch year for managers who need to
convince investors the asset class can deliver.
"We are still slightly underweight," said Tom Becket, chief
investment officer at UK-based Psigma Investment Management,
which builds bespoke portfolios for its clients. "We don't have
a huge amount of conviction that a turning point is imminent."
The S&P GSCI, a popular commodity index, fell 1.2 percent in
2013, but the average actively managed fund in the Lipper Global
Commodity sector lost 9.98 percent. Lipper is a Thomson Reuters
fund research company.
Only two of the 122 Lipper commodity funds generated a
positive return - the first-placed Credit Suisse Commodity
Access Strategy Fund, which gained 3.34 percent in
2013, and the specialist SafePort Strategic Metals & Energy Fund
, which returned a marginal 0.09 percent.
Some of the worst performers were hybrid stocks and futures
funds, dragged down by natural resource equities. Gold miners
fell 53 percent on average last year.
The best performers tended to be long/short or
market-neutral funds, as these were able to make money in
falling markets and limit downside risk.
Managers had different theories as to why decent commodity
performance proved so elusive in 2013.
"Over the last couple of years, if you invested in commodity
indices you lost money," said Mikko Heiskanen, portfolio manager
at Pohjola Asset Management. His OP Commodity Fund
returned 1.3 percent in the fourth quarter, earning fourth place
in the Lipper league table.
"The volatility that comes with that is high and it adds a
lot of risk to your portfolio, even if it's just a small
holding. So an exceptional amount of money has been taken out of
the commodity space, which doesn't help," he said.
A steady stream of redemptions took its toll on a commodity
hedge fund sector already battling losses, leading to some
high-profile closures in 2013, such as Higgs Capital, Arbalet
Capital and Clive Capital.
But Nelson Louie, global head of commodities in Credit
Suisse's asset management business, thought the reallocation of
money into areas such as equities had had less impact on
performance in the fourth quarter.
"The major commodity indices were up 1-5 percent in H2
2013," he said. "Most of the negative performance really took
place in the first half of the year as global GDP troughed and
various economies were trying to gain some traction."
Losses in the first half were so deep, however, that few
commodities ended the year in positive territory - niche
offerings such as cocoa, cotton and soybean meal fared best.
Among the more liquid commodities, only crude oil and natural
gas performed well.
"Commodities have come back down to more attractive prices,"
Louie is more positive about 2014, as the trend points to an
improvement in global growth. Barclays economists forecast
global GDP rising by 3.4 percent this year, up from 2.9 percent
"Economic indicators continue to improve, credit conditions
are better, sentiment is up, housing prices and financial
markets are up and central banks generally continue on their
paths of easy monetary policy," Louie said.
Psigma's Becket sounded a note of caution, saying an
improvement in commodity prices was more likely to occur in the
second half along with confirmation of the growth trajectory and
increased confidence about the long-term economic outlook.
"In the short term, that is still quite questionable," he
said. "There's quite a bit of complacency with regard to the
economic outlook and I wouldn't be surprised to see one more
selloff before things start to improve."
The supply picture also presents challenges, Heiskanen said.
One reason why investors avoided commodities in 2013 was
concerns about new supply coming on stream, especially in
Sustained low prices have prompted mining companies to
curtail production and shut unprofitable lines, however.
"Western producers have started to cut capacity over the
past year in metals like aluminium and nickel. This is helping
to stabilise sliding prices. We've seen prices at levels where a
lot of producers weren't profitable," he said.
Unfortunately for investors, the cutbacks in production
growth will take two to three years to filter through. "This is
not really a theme for 2014 but we are probably closer to the
bottom now than we were a year ago. The risk/reward is much
better skewed to the upside," Heiskanen argued.
He attributed some of his outperformance in the fourth
quarter to lead and nickel positions, but the bulk of it came
from underweighting or shorting gold. He remains relatively
positive on industrial metals but is cautious on precious metals
and gold in particular.
Bullion prices fell by 28 percent last year, but
rallies in the second half kept futures managers on their toes.
"Gold is very volatile because there is a huge amount of
short interest," he said. "I think we will continue to grind
lower but see snapbacks when the short interest becomes too high
and people get a bit nervous over short-covering rallies."
For the asset class as a whole, Louie believes the
environment is improving as cross-commodity and cross-asset
correlations decline. "We expect individual commodities to be
increasingly driven by fundamental supply/demand factors rather
than macroeconomic headlines," he said.
But fundamentals will also have to become more supportive if
price performance is to pick up. "Generally the asset class is a
bit unloved at the moment," Heiskanen said.
"Once we establish a base and see some prospects of
tightening in these markets, commodities can do reasonably well
over the medium term."
(Editing by Dale Hudson)