* Some see upswing running out of steam as China slows
* Tug of war in oil with Iran, strategic reserve release
* Precious metals still sought as QE3 seen back on the cards
By Claire Milhench
LONDON, April 11 (Reuters) - Commodity managers who performed well in the first quarter with tilts to oil and industrial metals remain bullish going into the second quarter but are prepared for rapid repositioning given the uncertainty around China, Iran and strategic oil reserves.
Strong U.S. and Chinese economic data at the start of 2012 encouraged some managers to increase their exposure to growth-sensitive commodities, but indicators have been more mixed in April. Managers are also wrestling with how best to position themselves given tensions with Iran over its nuclear programme.
“An escalation of the situation in Iran would temporarily bring the crude oil price to very high levels but then again eat into the global recovery,” said Mikael Simonsen, chief investment officer at ICECapital Asset Management. This would hit both industrial metals and energy prices.
The ICECapital Commodity fund rose by almost 10 percent in the first quarter, according to Lipper data, having benefited from an overweight to Brent crude oil futures and an underweight in U.S. crude oil futures.
“This position was clearly geopolitically defensive but still growth positive,” said Simonsen, adding that a positive view on gasoline also contributed to the outperformance.
“In general we wanted to position ourselves to reflect improving global GDP expectations after the dire sentiment in November 2011.”
The average actively managed fund in the Lipper Global commodity sector was up 2.3 percent in the first quarter as commodities benefited from an overall increase in risk appetite, but choppy markets created problems for some managers.
It was a rebound in cyclical commodities that helped the most bullish managers outperform their peers, with energy-tilted funds filling out the top of the Lipper league table.
Brent crude futures rose 13.4 percent in the first quarter as tensions with Iran escalated and markets fretted about supply disruptions. Meanwhile, New York gasoline RBOB futures were up 27 percent after a series of refinery closures on the U.S. East Coast raised expectations of shortages.
But managers faced a dilemma going into the second quarter as they weighed competing factors that could push the oil price higher or lower, requiring some nifty footwork if they are not to be caught out.
Benjamin Louvet, manager of the Prim Commodities fund , which was up 7 percent, said he was underweighting the oil sector for the moment after being long gasoil in the first quarter.
He takes the view that a strategic oil reserves release is likely in the coming weeks. “After this announcement, we will probably raise our allocation to petroleum products,” he said.
Managers also have to keep an eye on Iranian developments. Simonsen said he was continuing to overweight crude and the short-dated Brent contract in particular.
“It is difficult to assess probabilities for an Iran scenario, so we would be reactive rather than proactive there.” This would mean cutting the Brent weighting after a potential spike, conditional on a conflict, he said.
Meanwhile, the mixed data coming out of China, the world’s biggest buyer of many key industrial metals, has taken some of the bullish sentiment out of the market.
Louvet’s fund benefited from an overweight to copper in the first quarter, and he has retained this going into April, coupled with an overweight to aluminium. However, he is globally underweight base metals, saying supply factors are not supportive.
Simonsen expects stimulative measures to be taken by the Chinese government, with an easing of the required reserve ratio allowing banks to lend more. “This would bring fresh air under the wings of industrial metals in particular,” he said.
However, he is ready to reduce the fund’s market directional risk “materially”, as he described it, if he sees hints Chinese growth is close to or lower than the indicated 7.5 percent.
On the whole, managers remain fairly bullish, with Scott Wolle, lead manager of the Invesco Balanced-Risk Commodity Strategy Fund, saying that commodities still have room to appreciate in the second quarter.
His fund returned 10.33 percent, boosted by strategic overweights to crude oil and copper.
“Over the intermediate term, fundamentals look quite good and multiple risk factors - geopolitical risks, weather, and generally loose monetary policy - still tend to favour the asset class,” he said.
Simonsen also noted that a third round of quantitative easing by the U.S. Federal Reserve would be good for commodities and the precious metals sector in particular.
This option is in the spotlight again following a disappointing U.S. jobs report last Friday, which has raised doubts about the U.S. recovery.
Once again it was the more systematic-type funds such as Peak Capital Real Assets and the Forward Commodity Long/Short Strategy Fund that found the quarter difficult as choppy markets prevented trend-following and momentum models from performing at their best. (Reporting by Claire Milhench, editing by Jane Baird)