Funds News

Investors still favour commodities

LONDON (Reuters) - Investors are still positive on the outlook for commodities but after the collapse of U.S. investment bank Lehman, the focus has turned to counter-party risk, a Standard and Poor’s investor seminar heard on Thursday.

“The outlook is pretty uncertain ... but in two years’ time we will have a commodity allocation of 4-5 percent,” said Ronan O’Connor, head of risk management at the Irish National Treasury Management Agency.

That is up from a commodity allocation target of around 2 percent now, he said.

O’Connor works with asset allocation of the Irish National Pensions Reserve Fund, the 35th largest pension entity in Europe which manages around 20 billion euros.

Investors were becoming more diversified and more sophisticated in their investment approach to commodities, bankers said.

“We are very positive on commodities in general,” said Bharath Manium, a director of Barclays Capital.

Within the commodities sphere, sugar, carbon and Baltic dry freight were highlighted as Morgan Stanley’s favourites.

“In 2011, there is a substantial demand/supply imbalance in sugar,” said Benno Meier, executive director at Morgan Stanley.

But with large investment banks struggling or even filing for bankruptcy protection, as in the case of Lehman on Monday, structured products were seen less safe than other investment vehicles such as Exchange Traded Funds (ETF’s) or mutual funds.

“When we bought the notes originally in 2005-2006 who would have thought that the major names we made the transactions with would be under a cloud,” O’Connor said.

To avoid these very recent high risks investors were seen more willing to pay a premium on its investments.

“What this comes down to is cost and if you are going to pay a little bit more for something like exchange traded products or even mutual funds where you know that there is an underlying fund to your investment,” said Eric Kolts, vice president for commodity indices at Standard and Poor’s.

O’Connor said his fund would opt for segregated accounts to mitigate the risks as these can be transferred in its entirety to another bank.

“If we want credit risk we can take it outside of our portfolio,” he said.